1 

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LIBRARY 

umvE-sinr  OF 
CAiif. 

SAN  DIEGO 


THE 
WORK  OF  WALL  STREET 


AN  ACCOUNT  OF  THE   FUNCTIONS,  METHODS 

AND    HISTORY    OF    THE    NEW    YORK 

MONEY  AND  STOCK  MARKETS 


BY 

SERENO  S.  PRATT 


REVJSED,  REWRITTEN  AND  ENLARGED 


NEW  YORK  AND  LONDON 
D.  APPLETON  AND  COMPANY 
1912 


ComuoHT.  IPOS.  1012,  Br 
D.  APPLETON  AND  COMPANY 


Published  September,  19M 


Printed  in  the  United  States  of  America 


PREFACE 

So  vast  are  the  transactions  of  "Wall  Street,  so  tremend- 
ous are  the  interests  which  it  serves,  so  fundamental  to 
ihe  well  being  and  prosperity  of  the  whole  world  are 
the  operations  of  its  systems  of  credit  and  securities,  and 
so  varied  and  intricate  are  the  problems  involved  in  the 
activities  of  a  great  international  money  market,  that  to 
attempt  to  put  within  a  volume  of  moderate  size  an  ade- 
quate account  of  its  work,  and  of  the  principles  which 
underlie,  and  the  spirit  which  inspires,  that  work,  is  an 
undertaking  of  large  proportions.  The  author  hopes, 
however,  that  he  has,  in  good  measure,  achieved  success. 

The  writing  of  "The  Work  of  Wall  Street"  means 
something  more  than  a  description  of  the  speculative 
market.  The  Stock  Exchange  is,  indeed,  an  important 
part  of  Wall  Street,  but  it  is  not  Wall  Street.  The  finan- 
cial district  includes,  but  is  not  embraced  by,  the  stock- 
market.  The  Clearing-house,  far  more  the  Stock  Ex- 
change, is  the  heart  of  Wall  Street.  A  description  of  the 
work  of  Wall  Street  is  really  an  account  of  the  mighty 
economic  forces  by  which  the  commerce  and  industry  of 
the  richest  and  most  powerful  nation  of  the  globe  are 
carried  on.  A  commercial  country  without  a  central 
money  market  would  be  like  a  government  without  a 
capital.  The  greatness  of  Wall  Street  is  a  visible  proof 
of  the  greatness  of  the  United  States.  The  work  of 
Wall  Street  is  the  work  of  facilitating,  energizing,  mov- 
ing, expanding  and  safeguarding  the  work  of  the  country. 

Since  "The  Work  of  Wall  Street"  was  first  published 
in  January,  1903,  many  changes  have  taken  place  in  the 
structure  of  the  financial  center — changes  so  important 
that  a  thorough  revision  has  required  the  making  of  what 


vi  PREFACE 

is  practically  a  new  book,  in  matter  and  form,  although 
as  much  of  the  old  is  retained  as  has  been  unaffected  by 
the  passage  of  time. 

The  three  most  notable  changes  in  the  machinery  by 
which  Wall  Street  performs  its  work  have  been: 

1.  The  strengthening  of  the  Bank  Clearing  House  by 
the  admission  of  the  •principal  trust  companies  as  mem- 
bers; by  the  establishment  of  a  system  of  examinations 
by  which  the  Clearing-house  is  enabled  to  maintain  the 
banking  position  more  securely;  and  by  the  widening  of 
the  scope  of  the  bank  statement  and  the  improvement  in 
its  form. 

2.  The  amendment  of  the  rules  of  the  New  York  Stock 
Exchange,  by  which  improvements  have  been  instituted  in 
the  organization  of  the  stock-market  without  destroying 
its  facilities  for  effective  distribution  of  the  securities  of 
the  country  and  the  better  mobilization  of  capital;  one 
of  the  most  noteworthy  of  these  improvements  being  the 
abolition  of  the  Unlisted  Department;  and 

3.  An   expansion,   through    both   governmental   action 
and  individual  initiative,  of  that  publicity  which  is  the 
surest   safeguard   of  investor   and   speculator,   and   the 
strongest  preventive  of  the  evils  of  deceitful  manipula- 
tion and  dishonest  promotion. 

Moreover  much  financial  history  has  been  made  in  the 
past  ten  years ;  and  what  amounts  almost  to  a  revolution 
in  business  so  far  as  its  relations  to  government  is  con- 
cerned, is  in  progress.  The  question  is  being  fought  out 
with  Wall  Street  as  a  battlefield,  whether  the  business 
of  the  country  shall  be  conducted  on  a  competitive  basis, 
or  whether  modern  cooperation  on  a  big  scale  shall  be 
permitted,  or  whether  it  is  possible  so  to  combine  com- 
petition and  cooperation  as  to  obtain  their  largest  effi- 
ciency, without  the  peril  of  economic  anarchy  on  the 
one  hand  or  financial  tyranny  on  the  other. 

By  the  decisions  of  the  courts,  by  the  investigations 
of  expert  commissions,  and  by  the  studies  of  publicists 
and  economists,  new  light  has  been  thrown  upon  the 


PREFACE  vii 

theory  and  practice  of  money  and  banking,  and  of  pro- 
motion and  business  organization. 

The  Monetary  Commission,  of  which  ex-Senator  Al- 
drich  is  Chairman,  has  drafted  a  plan  of  monetary  reform 
which,  if  adopted,  will  take  rank  with  the  most  notable 
constructive  financial  achievements  in  the  history  of  this 
country  since  the  genius  of  Alexander  Hamilton  organized 
the  Treasury  and  established  the  first  United  States  Bank. 
The  publications  of  the  Commission  alone  constitute  a 
most  important  contribution  to  the  literature  of  money, 
banking  and  investment,  and  are  of  enormous  value  in 
educating  public  opinion  as  to  the  inestimable  benefits 
of  modern  credit,  properly  organized  and  safeguarded. 

Scarcely  less  valuable  than  the  work  of  the  Monetary 
Commission  is  the  report  of  the  Railroad  Securities  Com- 
mission, appointed  by  President  Taft,  of  which  Dr.  Had- 
ley,  President  of  Yale  University,  was  Chairman,  and 
which  presents,  with  clearness  and  scientific  precision  the 
principles  that  should  govern  the  issuance  of  railroad  se- 
curities. 

The  investigation  in  1909  of  speculation  in  securities 
and  commodities  by  a  commission  appointed  by  Governor 
(now  Justice)  Hughes,  and  headed  by  Horace  White,  has 
served  at  once  to  demonstrate  the  economic  value  of 
speculation  and  to  correct  many  defects  in  the  machinery 
of  the  speculative  markets. 

A  number  of  decisions,  notably  those  by  the  United 
States  Supreme  Court  in  the  interpretation  of  the  Sher- 
man Anti-Trust  Law,  have  profoundly  affected  the  or- 
ganization and  conduct  of  big  business. 

In  addition  to  these  great  changes,  the  past  ten  years 
have  witnessed  in  this  country  a  notable  development 
of  the  investment  market  and  a  corresponding  develop- 
ment of  facilities  for  supplying  the  needs  of  investors. 
The  science  of  investment  is  better  understood,  and  the 
art  of  investing  as  practiced  by  capitalists,  both  large  and 
small,  is  much  more  intelligent  and  discriminating ;  while 
the  high  class  bond  houses  by  their  methods  of  publicity 


viii  PREFACE      . 

and  distribution  are  making  more  distinct  the  line  mark- 
ing the  separation  between  the  true  and  the  false,  the 
sound  and  the  bogus. 

In  the  meantime  the  volume  of  speculation  since  the 
panic  of  1907,  has  materially  declined,  which  is  attributed 
by  some  to  the  State  tax  on  stock  transfers,  amounting 
to  two  dollars  per  100  shares.  This  tax  imposed,  during 
the  administration  of  Governor  Higgins — because  "the 
State  needed  the  money," — is  uneconomic  because  it  is 
a  tax  on  sales,  but  it  has  proved  a  heavy  revenue  pro- 
ducer, though  hurtful  to  the  commission  houses.  The  re- 
duction in  the  volume  of  sales  may  be  more  properly 
attributable  to  the  decline  in  gambling  and  manipulative 
transactions.  Wall  Street,  however,  has  passed  through 
other  periods  of  speculative  depression  and  then  expe- 
rienced a  rapid  revival,  as  for  instance,  after  the  panic  of 
1893. 

In  this  connection  attention  should  be  called  to  the  won- 
derful expansion  in  advertising  in  the  past  decade,  and 
especially  to  what  has  been  achieved  in  widening  the 
scope,  improving  the  quality,  and  strengthening  the  power 
of  financial  advertising.  Some  progress  at  least  has  been 
made  in  preventing  this  stupendous  agency  for  the  wise 
and  wide  distribution  of  investments  from  being  seized 
by  the  hands  of  the  sharks  who  are  ever  using  the  adver- 
tising columns  for  the  purpose  of  swindling  the  innocents 
and  the  fools  out  of  their  savings. 

In  spite  of  the  tremendous  strain  put  upon  capital  and 
enterprise  during  the  last  ten  years,  we  have  as  a  na- 
tion made  progress  in  material  prosperity,  for  such  are 
the  vast  resources  of  our  country,  that  political  and  eco- 
nomic changes  may  retard  growth,  but  cannot  entirely 
stop  growth. 

In  ten  years  the  estimated  wealth  of  the  country  has  in- 
creased fully  $20,000,000,000.  Our  money  in  circulation 
has  increased  a  billion  dollars.  Our  bank  clearings  and 
bank  deposits  have  doubled. 

When  "The  Work  of  Wall  Street"  was  first  published 


PREFACE  ix 

in  January,  1903,  it  was  practically  a  pioneer  in  its  field. 
It  was  the  first  attempt  to  describe  comprehensively  the 
machinery  with  which  Wall  Street  promotes  the  enterprise 
and  facilitates  the  exchanges  of  the  country  and  provides 
a  regulated  market  for  securities.  In  the  preface  of  the 
first  edition  it  was  said  that,  while  Wall  Street  filled  a 
large  space  in  the  daily  papers,  this  was  chiefly  in  a  sen- 
sational way;  and  there  existed  a  remarkable  degree  of 
ignorance  regarding  the  actual  work  of  the  financial  dis- 
trict, while  the  history  of  speculation,  and  of  its  effects 
on  the  development  of  civilization  had  not  been  deeply 
studied.  Ten  years,  however,  have  wrought  a  change. 

Since  the  issue  in  1903,  there  have  been  a  number  of 
publications,  books,  pamphlets  and  articles  covering  in 
part  the  same  field  as  "The  Work  of  Wall  Street."  The 
past  ten  years  have  been  a  time  of  popular  education  in  the 
theories  and  practices  of  business,  and  there  has  been  a 
notable  output  of  books  bearing  upon  various  branches 
of  the  subject.  Of  the  publications — books  and  maga- 
zine articles — relating  directly  to  securities  and  Stock 
Exchanges,  Professor  S.  S.  Huebner  of  the  University  of 
Pennsylvania  gave  in  the  Annals  of  the  American  Acad- 
emy (May,  1910)  a  list  of  198;  and  a  majority  of  these 
have  been  published  since  "The  Work  of  Wall  Street" 
was  issued  in  1903.  Moreover  since  Professor  Huebner 
made  his  bibliography  other  publications  have  appeared 
which  should  be  added  to  the  list.  In  "The  Work  of 
Wall  Street ' '  the  author  makes  reference  to  over  one  hun- 
dred books,  reports  and  pamphlets  on  money,  banking 
and  speculation. 

Instead,  therefore,  of  there  being  a  lack  of  information 
regarding  the  work  of  Wall  Street,  as  was  the  case  when 
the  first  edition  was  issued,  there  is  now  what  might  al- 
most be  described  as  a  literature  on  the  subject.  This 
fact  might  be  regarded  as  rendering  unnecessary  a  re- 
vision of  "The  Work  of  Wall  Street"  were  it  not  for  two 
things.  There  are  now  so  many  publications,  relating  to 
various  branches  and  aspects  of  the  Wall  Street  system, 


x  PREFACE 

that  there  is  still  a  place  left  for  a  book,  like  this,  which 
aims  at  giving  a  comprehensive  but  concise  account  of 
the  whole  mechanism  in  the  light  of  the  development  of 
the  past  ten  years,  in  order  that  th'e  investigator  may  find, 
in  one  place,  the  essentials  of  a  subject,  which  in  some  of 
its  different  parts  may,  perhaps,  be  found  in  larger  detail 
in  other  publications.  Moreover,  ''The  Work  of  Wall 
Street, ' '  in  spite  of  the  fact  that  it  was  written  ten  years 
ago,  still  remained,  according  to  Mr.  F.  W.  Hirst  of  the 
London  Economist,  "the  best  description  of  the  Wall 
Street  system."  Under  such  conditions  it  has  seemed 
proper  to  continue  its  publication  and  to  bring  it  up  to 
date  by  discriminating  revision. 

In  making  this  revision  the  author  has  believed  that  it 
was  better  to  leave  untouched  that  which  has  stood  the 
test  of  ten  years,  and  make  only  such  alterations  and  ad- 
ditions as  were  rendered  necessary  by  the  actual  changes 
in  the  system  itself  and  by  a  larger  view  of  the  subject. 
This  has  required,  however,  the  omission  of  much  old  mat- 
ter, and  much  new  writing,  with  the  net  result  of  ma- 
terially increasing  the  size  of  the  volume  and  making  it 
virtually  a  new  book.  The  author  has  deemed  it  to  be  in 
the  interest  of  the  student  to  include,  in  its  entirety,  in 
this  edition,  the  report  of  the  Hughes  Commission  on 
speculation,  to  which  he  has  added  a  number  of  notes  of 
his  own  for  the  further  enlightenment  of  the  reader.  The 
chapter  on  the  Stock  Exchange  Clearing  House,  having 
received  the  approval  of  the  Chairman  of  the  Clearing 
House  Committee  when  first  published,  is  continued,  un- 
changed except  for  a  slight  explanatory  note. 

New  chapters  on  the  function  and  the  scope  of  Wall 
Street,  on  investment,  speculation  and  gambling,  and 
on  reading  the  market,  have  also  been  introduced,  and 
much  new  matter  has  been  added  in  the  chapters  on 
"The  Stock  Company,"  "Listing  of  Securities,"  "The 
Stock  Exchange,"  "The  Credit  Institutions  and  the 
Clearing  House,"  "The  Bank  Statement  and  the  Move- 
ment of  Money,"  "The  Investment  Market,"  "The  Curb 


PREFACE  xi 

Market,"  "Foreign  Exchange  and  the  Balance  of 
Trade,"  and  "Panics."  In  fact  most  of  the  book  has 
been  rewritten.  Numerous  citations  from  economic  and 
financial  authorities  have  been  added,  and  most  of  the 
chapters  conclude  with  a  bibliography. 

To  Mr.  James  G.  Cannon,  President  of  The  Fourth  Na- 
tional Bank,  a  leading  authority  on  commercial  credits 
and  Clearing  Houses,  the  author  owes  the  original  in- 
spiration for  this  book,  as  well  as  valuable  assistance  in 
the  gathering  of  material.  The  author  is  also  indebted  to 
Mr.  Maurice  L.  Muhleman,  Secretary  of  the  Hughes  Com- 
mission, and  formerly  Deputy  Assistant  United  States 
Treasurer,  for  important  new  matter  in  the  chapter  on 
"The  Subtreasury"  and  also  for  further  assistance.  He 
desires  likewise  to  make  large  acknowledgment  of  help 
to  his  friend  and  former  colleague,  Mr.  Thomas  F.  Wood- 
lock,  once  editor  of  the  "The  Wall  Street  Journal,"  but 
now  member  of  the  New  York  Stock  Exchange. 

In  the  revision  moreover  he  has  had  the  active  assist- 
ance of  his  son,  Mr.  Thomas  B.  Pratt,  of  "The  Wall 
Street  Journal." 

The  author  himself  has  had  for  several  years  no  con- 
nection whatever  with  the  securities  market,  and  in  view 
of  his  other  interests,  he  would  not  have  undertaken  a 
further  description  or  analysis  of  its  mechanism,  if  it  had 
not  been  for  the  fact  that  he  felt  the  responsibility  result- 
ing from  his  authorship  of  ' '  The  Work  of  Wall  Street ' ' ; 
and  as  it  had  to  be  revised,  he  believed  that  it  was  his 
special  duty  to  perform  the  labor. 

Returning  to  his  study  of  the  Wall  Street  system,  after 
several  years  of  absence,  he  finds  that  his  outlook  upon 
it  as  a  friendly  but  discriminating  critic  is  unchanged, 
and  he  repeats  what  he  said  in  the  preface  to  the  first  edi- 
tion: 

"The  author  has  conceived  his  duty  to  be  that  of  a  re- 
porter rather  than  of  an  editor.  He  has  sought  to  pre- 
sent the  facts  as  they  are,  leaving  to  others  to  inquire  why 
they  are  not  something  very  different.  He  has  endeav- 


xii  PREFACE 

ored  to  maintain  an  impartial  attitude  toward  Wall 
Street,  neither  seeking  to  defend  it  against  just  criticism 
nor  joining  in  the  too  common  assault  upon  it  as  a  blot 
upon  civilization.  No  one  can  study  this  theme  with  un- 
biased mind  without  being  impressed  with  the  indispens- 
able place  the  stock-market  fills  in  modern  business,  of 
the  great  value  of  its  manifold  services  to  the  world,  and 
of  the  extraordinary  efficiency  of  its  mechanism;  and 
without,  at  the  same  time,  realizing  how  vast  are  the 
evils  to  which  it  gives  rise,  how  short  and  easy  is  the 
step  from  beneficent  investment  to  reckless  and  unprin- 
cipled gambling,  and  how  great  is  the  peril  of  overspecu- 
lation." 

"Wall  Street  depends  upon  the  country  for  its  suste- 
nance, but  Wall  Street  is  essential  to  national  progress. 
Any  attempt  on  the  part  of  Wall  Street  to  abridge  the 
liberty  or  throttle  the  natural  growth  of  the  country,  or 
any  attempt  on  the  part  of  the  country  in  anger,  revenge, 
or  ignorant  passion  to  destroy  Wall  Street  would  be 
equally  ruinous,  for  a  house  divided  against  itself  can- 
not stand. 

The  first  edition  was  dedicated  to  J.  Edward  Simmons 
as  a  type  of  all  that  is  best  in  the  work  of  Wall  Street. 
Mr.  Simmons  has  since  died  after  a  business  career 
crowned  with  honorable  achievement. 

S.  S.  P. 


CONTENTS 

CHAPTER  PAGE 

I. — EVOLUTION    OF    WALL    STREET 1-35 

Origin  of  money,  stocks  and  speculation — Be- 
ginnings of  the  English  and  French  stock- 
markets — 'Wall  Street  has  imported,  but  Amer- 
icanized their  methods — Early  history  of  the 
Street — Speculation  that  set  in  after  the  Revo- 
lutionary War — The  brokers'  agreement  of  1792 
— The  first  financial  machinery — The  stock-mar- 
ket of  1801 — Panic  of  1812 — Early  conference 
of  bankers — Organization  of  the  Stock  Exchange 
— New  York  forges  ahead  of  Philadelphia — 
Foreign  bankers  appoint  American  agents — List- 
ing of  first  railroad  stock — London  trading  in 
American  securities — Struggle  between  Jackson 
and  the  United  States  Bank — Excited  specula- 
tion between  1830  and  1840 — Early  market 
reports — Panic  of  1837-'41 — Philip  Hone's  descrip- 
tion of  Wall  Street  in  1842— Establishment  of  the 
Subtreasury  system — Boom  caused  by  discovery 
of  gold  in  California — Overspeculation  brings  on 
panic  of  1857 — Wall  Street  during  the  civil  war 
— Establishment  of  bank  and  stock  clearances, 
and  introduction  of  the  cable,  the  stock  indicator, 
and  the  telephone — Speculation  in  gold — Black 
Friday  and  the  Erie  wars — Panic  of  1873 — The 
Exchange  closes  its  doors — Boom  of  1879 — Panics 
of  1884,  1890,  and  1893— The  McKinley  boom— 
The  "Captains  of  Industry" — A  new  era  in  Wall 
Street  History — The  co-operation  issue — Regula- 
tion of  Railroads — The  Big  Gold  Production — 
Panic  of  1907 — Dissolution  of  big  holding  com- 
panies— Plans  of  E.  H.  Harriman — Men  who  have 
made  Wall  Street  famous — Recent  changes  in  ar- 
chitecture and  methods — Expansion  of  the  mech- 
xiii 


xiv  CONTENTS 

CHAPTER  PAGE 

anism  of  money  and  speculation — The  progressive 
,      stages  of  market  evolution. 

(    II. — GENERAL  VIEW  OF  WALL  STREET 36-44 

The  shortest  and  the  longest  street — The  man 
who  is  "in  Wall  Street" — Boundaries  of  the  Fi- 
nancial District  and  position  of  its  Prominent 
Buildings — The  Chamber  of  Commerce — Concen- 
tration of  capital  in  the  Street — Comparison  with 
London — Vastness  and  Provincialism — Conserva- 
tive force  in  the  country. 

III. — FUNCTION  OF  WALL  STREET 45-48 

The  Gateway  of  Commerce — Facilitates  the  flow 
of  money — Promotes  enterprise — Safeguards 
commerce — Maintains  the  Credit  System — Aids 
in  the  diffusion  of  wealth — The  price  charged  for 
its  services — Seat  of  Stock  and  Money  Markets. 

IV. — SCOPE  OF   WALL   STREET 49-57 

Statistics  of  number  of  corporations  and  amount 
of  securities — Sixty  per  cent,  of  nation's  wealth 
represented  by  stocks  and  bonds — Millions  of 
holders  of  securities — Bank  credits  based  on 
stocks  and  bonds — Securities  listed  in  New  York 
Stock  Exchange — Expansion  in  forty-three  years 
— Foreign  securities  listed — Comparison  with 
London — Exportation  of  Capital — Foreign  com- 
merce— International  and  domestic  exchanges— 
Money  Power. 

V. — THE    STOCK-MARKET 

A  place  where  incomes  are  bought  and  sold — 
Macaulay's  account  of  the  beginnings  of  the 
English  market — The  reason  for  such  a  market 
and  the  evils  to  which  it  is  exposed — Stock  ex- 
changes essential  to  civilization — Provide  places 
for  investment  of  savings — Savings-bank  depos- 
itors and  insurance  policy  holders  in  the  market 
by  proxy — Advantages  of  stocks  and  bonds  for 
investment — Upon  the  foundation  of  investment 
has  been  built  a  vast  superstructure  of  specu- 
lation— Lines  drawn  between  investment  and 


CONTENTS  xv 

CHAPTER  PAGE 

speculation  and  speculation  and  gambling — 
The  merchant  and  the  speculator — Speculation 
a  method  for  adjusting  differences  of  opinion 
as  to  future  values — Point  where  it  becomes  a 
disease  of  the  mind — Public  in  the  Street — 
Entire  supply  of  stocks  sold  three  times  over — 
Overspeculation — Study  of  records  of  sales  and 
what  may  be  learned  from  them — Sales  in  bull 
and  bear  periods  of  twelve  years — Division  of 
the  market  into  manipulation,  room  trading  and 
actual  business  by  pools  and  public — Average 
number  of  persons  in  the  market  all  the  time — 
Bulls  and  bears,  longs  and  shorts,  professionals 
and  lambs — Average  number  of  different  stocks 
traded  in — Railroads  and  industrials — The  dif- 
ferent groups  of  stocks — Sympathetic  effect  of 
one  group  upon  another. 
VI. — INVESTMENT,  SPECULATION  AND  GAMBLING  .  .  77-90 

Sight,  faith  and  chance — Need  of  new  definitions 
*  — Buying  for  income  and  for  profit — True  distinc- 
tion between  speculation  and  gambling — The 
state  of  mind — Intent  of  the  operator — Same  ma- 
chinery for  all — Interference  with  economic  law 
— Supreme  Court  opinion — A  Civil  War  Illustra- 
tion— Lincoln's  view — Speculation  in  gold — 
Short  Selling — The  two  sides  of  speculation — 
Value  of  speculators — Balance  wheel  of  indus- 
try— Beecher's  opinion — Morality  of  taking 
risks — People  who  should  not  speculate — Women 
— Persons  of  limited  capital — Trustees  of  other 
people's  money. 

VII. — VALUES  AND  PRICES 91-103 

The  table  of  sales  and  quotations — Phenomena 
of  sudden  changes  in  prices — Wide  fluctuations 
in  a  day,  a  month,  and  a  year — Stocks  paying 
the  same  dividends  sell  at  different  prices — Dif- 
ficult to  reconcile  the  apparent  inconsistency  of 
prices — What  constitutes  value? — Wall  Street  is 
always  striving  to  discount  the  future — Prices 
often  vary  from  the  measures  of  value — Effect  of 


xvi  CONTENTS 

CHAPTER  PAGE 

manipulation — Scientific  theory  of  values  and 
prices — The  Dow  theory — The  primary,  secon- 
dary, and  tertiary  movements — Close  study  of 
real  values  essential  to  success — The  law  of  aver- 
ages— Stock-market  charts  and  systems — Gould's 
description  of  Wall  Street— The  Woodlock  state- 
ment of  tides  and  eddies 

VIII. — THE   STOCK   COMPANY 104-124 

The  stock  certificate  the  corner-stone  of  Wall 
Street — The  corporation  defined — Tendency  to 
convert  all  forms  of  business  into  companies — 
Advantage  over  partnerships — Par  value — How  a 
stock  company  is  formed — Work  of  the  promoter, 
the  banker,  the  lawyer,  and  the  underwriting 
syndicate — Progress  of  a  stock  certificate  from 
the  organizer  to  the  investor — New  Jersey  cor- 
porations— Definitions  of  a  trust — Changes  in 
meaning — Holding  companies — Stock  watering — 
Corporation  problem — Advantages  and  abuses  of 
stock  company  system — Cooperation — Efficiency — 
Economy  —  Limited  liability  —  Continuity  —  Dif- 
fusion of  wealth — Concentration — Democracy — 
Mobility — Measure  of  value — Impersonality — 
Monopoly — Power — Oppression — Criminal  promo- 
tion— Organization — Various  methods  for  safe- 
guarding control — Certificates  of  stock  described 
— Requirements  of  the  Exchange  as  to  engrav- 
ing— Divisions  of  stock,  preferred  and  common — 
Various  classes  of  bonds — Foreclosure  of  a  mort- 
gage— Creating  a  debt  to  pay  dividends  illegit- 
imate finance. 

IX. — LISTING  OF  SECURITIES 125-132 

Definition — The  Exchange  does  not  guarantee 
values,  but  has  strict  rules  governing  admission 
to  the  list — Position  of  the  Exchange  authorities 
— Publicity — Safeguards  are  numerous — Listing 
requirements — Full  reports  of  operation  and 
financial  condition  required — Statistics  of  listing. 

X. — THE  NEW  YOBK  STOCK  EXCHANGE  .  .  133-162 


CONTENTS  xvii 

CHAPTEB  PAGE 

Need  of  organizing  the  market — Number  of 
Stock  Exchanges — Objects  and  mechanism — In- 
sists upon  honorable  dealings — Limits  to  powers 
and  responsibilities — A  national  institution — 
Number  of  out-of-town  members — Branch  offices 
— Members  who  are  principals — Two-dollar 
brokers — Room  traders — Specialists — Average  at- 
tendance— Qualifications  for  membership — Values 
of  seats — Expulsion  for  fraud — Rates  of  commis- 
sion— Hours  of  opening  and  closing — Duties  of 
the  Chairman — Scenes  at  the  opening — The  Ex- 
change as  a  show  place  for  tourists — Methods  of 
trading — The  broker's  pad — Device  for  calling 
members — Orders  by  telephone — Work  of  a  board 
member — Precedence  of  bids  and  offers — No  fic- 
titious trading  permitted — Sale  of  privileges  pro- 
hibited— System  of  comparisons — Rules  for  de- 
livery— Assignment  of  stock — Ex-dividend  trans- 
actions— Borrowing  of  stocks — Selling  short  ex- 
plained— Bond  dealings — Stock  Exchange  fail- 
ures— Government  of  the  Exchange — Distinction 
of  the  presidency — The  Exchange  building — 
Mechanism  compared  with  the  London  Stock 
Exchange — Arbitrage  dealings — Dissemination  of 
news — "How's  London?" — Method  of  receiving 
London  Quotations. 


r  XL — NEW  YOBK  STOCK  EXCHANGE  CLEARING-HOUSE  .  163-181 
Growth  of  stock-market  limited  by  ability  of 
money  market — Limit  seemed  to  be  reached  in 
1892 — Stock  clearances  were  then  established 
— Early  history — Report  of  special  committee — 
Legality  of  clearances — System  proved  adequate 
in  panic  of  1893  and  boom  of  1901 — Clearances 
in  those  years — Stock  Clearing-House  capable  of 
indefinite  expansion — Operation  of  clearances  ex- 
plained, with  illustrations  of  blanks  and  forms 
used — Secrecy  maintained. 

XII. — TOOLS  OF  WALL  STREET 182-197 

Most  of  the  tools  are  time-savers — Work  of  the 
stock    indicator — Abbreviations    of    the    tape — 
2 


xviii  CONTENTS 

CHAPTER  PAGE 

Number  of  impressions  in  a  year — Statistics  of 
stock  transactions — Bird's-eye  view  of  twelve 
years — The  ticker  a  time-keeper — Exchange  re- 
ports, but  does  not  guarantee  quotations — Work 
of  the  telegraph — Leased  wires — The  cable  has 
revolutionized  the  commerce  of  the  world — Cable 
codes — The  telephone  in  Wall  Street — The  news 
agencies — The  news  "tickers"  and  news  slips — 
The  market  reports — First  financial  paper. 

XIII.— THE  CUBB  MABKET 198-201 

Affinity  between  stock-brokers  and  curbstones— 
The  early  curb  markets  of  London  and  Paris 
— The  stock-market  was  born  on  the  street — 
Present  meeting  place — Extent  and  methods  of 
business — No  competition  with  the  Exchange — 
New  organization  of  the  market — Freedom  of 
the  market 

XIV. — THE  INVESTMENT  MARKET       202-208 

Value  and  function  of  investment — Task  of  in- 
vestment— John  Jacob  Astor  would  trust  only 
himself  in  making  investments — Point  where  in- 
vestment may  become  mere  speculation — Wall 
Street's  elaborate  machinery  for  investments — 
The  promoter  flourishes  in  every  form — The 
standpoints  from  which  to  study  investments — 
Yield,  security,  duration,  and  taxation — Methods 
of  estimating  bond  values — Interest  rates  a 
generation  ago  and  now — General  classes  of  in- 
vestments— The  woman's  investment — The  sav- 
ings bank  investment — The  business-man's  invest- 
ment— The  speculative  investment — Selling  bonds 
— Advertising  investments. 

XV. — THE  BROKER  AND  HIS  OFFICE 209-226 

Opposing  views  of  the  standing  and  business  of 
the  stock  broker — A  middleman — Different  kinds 
of  brokers — Characteristics  of  brokers — What 
they  must  know — Breadth  of  their  horizon — 
Sometimes  a  power  outside  of  their  own  class 
— Brokers  who  speculate  and  brokers  who  do  a 


CONTENTS 


xix 


CHAPTER  PAGE 

strictly  commission  business — Relations  to  cus- 
tomers— Need  of  making  a  wise  choice  of  a 
broker — Law  of  stock  brokerage — The  large  com- 
mission house  described — A  strange  environment 
— Opening  an  account — Policy  in  regard  to  advis- 
ing customers — Amount  of  margins  required — 
Interest  charged — A  customer's  control  over  his 
account — The  statement  rendered — The  broker's 
routine — Norton  on  the  carrying  out  of  an 
order. 

XVI. — THE  LANGUAGE  OF  WALL  STREET 227-234 

The  many  technical  and  slang  words  and  phrases 
employed — Their  individual  significance  and  re- 
lated meaning — Communities  of  interest — Many 
of  the  terms  as  old  as  speculation  itself — Origin 
of  some  of  the  terms. 

XVII. — READING  THE  MABKET 235-251 

Need  of  special  training  in  business — The  edu- 
cated man  in  Wall  Street — Reading  "the  signs  of 
the  times" — Difference  between  the  big  man  and 
the  small — Agencies  of  publicity — Sources  of  in- 
formation— The  daily  newspaper — The  trade 
paper — Government  publications — Manuals — Fi- 
nancial authorities — Influences  affecting  the 
market  which  must  be  studied — International  and 
domestic  politics — Products  of  the  soil — Crops 
and  minerals — Industrial  production — Foreign 
commerce  and  home  trade — How  volume  of  do- 
mestic commerce  may  be  measured — By  bank 
clearings,  railroad  earnings,  cars  in  use,  statistics 
of  failures,  trade  reviews,  index  price  numbers — 
Conditions  of  banking — Corporation  reports — 
— Technical  position  of  the  market — Price  move- 
ments— Example  of  methods  used  in  reading  the 
market. 

XVIII. — THE   CREDIT    INSTITUTIONS    AND   THE   CLEARING- 
HOUSE       252-265 

The  money  market  is  a  credit  market — A  bank 
is  a  manufactory  of  credits — Percentage  of  busi- 


xx  CONTENTS 

CHAPTER 

ness  done  on  credit — Commerce  of  the  world  on 
a  credit  basis — Value  of  credit— Money  unused  a 
burden ;  in  action,  a  beneficence — Extent  to  which 
the  banks  multiply  the  power  of  money — The 
capitalist  and  the  banker — The  various  kinds  of 
banks — The  National  are  the  reserve  banks — The 
reserve  cities — Needle  of  the  financial  compass 
points  toward  New  York — Growing  size  of  banks 
— Competition — The  Bank  Clearing  House  and  its 
place  in  the  Wall  Street  mechanism — Method  of 
clearing — Important  Clearing  House  functions — 
Expansion  of  Clearing  House — Clearings  in  the 
United  States 

XIX. — THE  USE  OF  CREDIT  IN  STOCK  EXCHANGE  TRANS- 
ACTIONS    266-291 

Sources  of  Wall  Street's  credit — Out-of-town 
loans — Ways  in  which  the  money  and  the  stock- 
markets  meet — How  brokers  obtain  credit — Cer- 
tification and  over-certification  of  checks  ex- 
plained in  detail — Amount  of  certification  re- 
quired— Legality — Making  of  call  loans — Rates 
established  in  the  Exchange — The  Usury  Law — 
Banks  do  not  rejoice  in  high  rates — Calling  of 
loans — The  loan  envelopes — The  Broker's  Note — 
Substitution  of  one  security  for  another — Com- 
parison of  security — Kind  of  collateral  demanded 
by  the  banks — Marking  up  rates — The  banks'  pro- 
tection— Agreement  with  customers — Time  loans 
— Three  classes  of  Credit 
XX. — THE  BANK  STATEMENT  AND  THE  MOVEMENT  OF 

MONEY 292-311 

Important  changes  in  bank  statement— Stock- 
market  sensitive  to  changes  in  the  money  rate — 
Statement,  when  issued  and  how  made  up — A 
complete  exhibit  of  January  13,  1912 — The  law  of 
averages— Statement  of  actual  condition — "Win- 
dow dressing" — Analyzing  the  statement — Four 
most  important  items — The  legal  reserve — Signifi- 
cance nnd  effect  of  a  deficit — The  "dead  line" 

The  pyramid  of  credit— Meaning  of  the  word  de- 


CONTENTS  xxi 

CHAPTEB  PAGE 

posits — The  cash  holdings — Possible  manipula- 
tion of  the  money  market — Principal  movements 
of  money — Statistics  of  movement  1910-1911 — 
Currency  to  move  the  crops — New  York  possesses 
many  sources  of  supply  of  credit 

XXI. SUBTREASUBY  AND  ASSAY  OFFICE 312-320 

Power  of  the  Secretary  of  the  Treasury  in  the 
markets — Intimate  relations  between  the  Treas- 
ury and  the  Street — Meetings  of  bankers  at  the 
Subtreasury — High  standing  of  the  office  of  As- 
sistant Treasurer — Establishment  of  the  office — 
Government  deposits  in  banks — Number  of  sub- 
treasuries — Influence  on  money  market — Trans- 
fers of  money — Archaic  system — Work  of  the 
subtreasury — Work  of  the  Assay  Office — Dual 
character  of  gold — Sale  of  bars — Abrasion  of 
coin  in  transit — History  of  the  Subtreasury  and 
Assay  Office  buildings. 

XXII. — FOBEIGN  .EXCHANGE  AND  THE  BALANCE  OF  TBADE  321-339 
Magnitude  of  transactions — What  international 
exchanges  represent — Kinds  of  bills  issued — Buy- 
ing and  selling  of  bills — Few  have  complete  grasp 
of  the  subject — Experts  trained  in  German  Uni- 
versities— How  the  system  of  foreign  exchange 
was  evolved — Popular  misconceptions — Actual 
rate  of  exchange  depends  not  only  on  difference 
in  value  of  coins  but  on  state  of  international 
credits — Definitions — Exchange  market  a  vast 
international  clearing-house  in  which  balances 
are  paid  in  gold — Gold  shipments,  how  controlled 
— Movement  of  money  to  the  highest  market — 
The  balance  of  trade — Even  Wall  Street  is  prone 
to  misconceive  its  significance — The  many  blind 
items — Careful  estimate  of  the  unknown  quanti- 
ties— What  the  United  States  has  to  pay  Europe, 
and  what  Europe  has  to  pay  the  United  States — 
Calculations  of  the  profits  of  gold  shipments  to 
London  and  Paris  in  bars  and  coin — Modus 
operand!  of  making  sterling  loans. 


xxii  CONTENTS 

CHAPTER  PAGE 

XXIII. — PRIVATE    BANKERS    AND    UNDERWRITING    SYNDI- 
CATES    340-348 

Leadership  of  the  great  bankers — They  supply 
the  sinews  of  war — Their  field  of  operations  as 
wide  as  the  world  itself — Their  functions — J. 
Pierpont  Morgan  the  only  man  to  deal  in  billions 
of  dollars — His  account  of  his  own  business — A 
conference  at  Morgan's — Underwriting  of  securi- 
ties— Commissions  and  possible  profits — Great 
specialists  in  finance  charge  high  for  their 
services 


349-363 

History  of  stock-market  an  alternation  of  booms 
and  panics — The  order  of  events — Phenomena  of 
credit — The  cycle  theory — The  business  cycle — 
Forecasting  a  crisis — Brief  account  of  the  Ameri- 
can panics — Safeguards — Clearing-House  loan 
certificates — Historical  record— Result  of  1907 
panic  is  a  movement  for  a  Central  Reserve  As- 
sociation 

XXV. — MANIPULATION  AND  CORNERS 364r370 

Adroit  manipulation  and  dishonest  manipulation 
— False  reports  and  tips — Wash  sales  and 
matched  orders — The  higher  type  of  manipula- 
tion a  millionaire's  game — How  secrecy  is  main- 
tained— A  story  of  Jay  Gould — Pool  operations 
— Supi>orting  stocks  to  secure  credit — Bear 
manipulation — Uncovering  stop  orders — New 
York  manipulation  via  London — Not  easy  to 
fathom  the  operations  of  manipulators — A  corner 
described — The  most  famous  corners — Corners 
in  products  usually  failures. 

XXVI. — PESTS  OF  WALL  STREET 371-375 

Financial  degenerates  and  stupid  money — The 
Street  filled  with  bogus  brokers — Bucket-shops 
and  blind-pool  sharps — Exchange  wages  war 
upon  them — Advertising  by  brokers — No  adver- 
tisements permitted  by  the  London  Exchange — 
Protection  against  dishonest  advertisers — The 


CONTENTS  xxiii 

CHAPTEE  PAGE 

Street   should   not  be  judged  by   the  pests   of 
the  stock-market. 

APPENDIX. — THE  HUGHES  COMMISSION  REPORT  .  .  .  376-422 
Appointment  of  Commission  by  Governor  Hughes 
to  investigate  speculation — Two-fold  effect  of  its 
report — Takes  rank  with  Royal  Commission  re- 
port of  1877 — Full  text  of  Hughes  Commission 
report  with  notes  by  the  author — The  subject  in 
general — The  problem  to  be  solved — The  Stock 
Exchange  patrons  of  the  Exchange — Character 
of  the  transactions — Margin  trading — Pyramiding 
— Short  selling — Manipulation — Wash  sales — Cor- 
ners— Failures — Rehypothecation — Dealings  for 
clerks — Listing  requirements — Fictitious  trades — 
Unit  of  trading — Stock  clearing — Specialists — 
Branch  offices — Incorporation — Wall  Street  as 
a  factor — Consolidated  Stock  Exchange — Hold- 
ing companies — Receiverships — Effect  of  money 
market — Usury  Law — Curb  market — Evils  of  un- 
organized statutes — Abuse  of  advertising — British 
system — Legislation  recommended — Bucket  shops 
— Sales  of  quotations — Licensing  tickers — The 
commodity  exchanges — Dealings  in  futures — 
Hedging — The  Produce,  Cotton  and  Coffee  Ex- 
changes— Experience  of  Germany. 


LIST  OF  ILLUSTRATIONS 

PAGE 

Map  of  Wall  Street  district 37 

The  broker's  pad 144 

Sellers'  clearance  ticket 172 

The  clearance  sheet 173 

The    clearing-house    draft 174 

Statement  of  stock  to  deliver 175 

The  allotment  sheet 178 

The  stock  tape  as  it  comes  from  the  "ticker" 18G 

Chart  showing  number  of  impressions  on  tape 188 

Example  of  Wall  Street  news  slip 193 

Page  printer 194 

How  news  is  printed  on  a  Page  printer 195 

Broker's  statement  rendered  to  customer 223 

Form  used  in  calling  loan 276 

Form  of  recording  time  loan 279 

Record  of  demand  loan 281 

Note  given  by  broker 282 

The  bank's  envelope .        283 

The  loan  card 284 

The  bank's  loan  card 285 

Request  for  substitution 286 

Notice  of  change  in  rate  of  interest 288 

The  inverted  pyramid  of  credit 304 

The  business  cycle 353 

Diagram  showing  one  dollar  of  defaulted  liabilities  to  one 
thousand  dollars  of  bank  clearings 355 


CHAPTER  I 

EVOLUTION  OF  WALL  STREET 

Long  indeed  has  been  the  evolution  producing  the 
sensitive  and  powerful  mechanism  of  Wall  Street,  which 
has  developed,  naturally  and  inevitably,  in  response  to 
human  needs.  The  principal  processes  of  the  money 
market  may  be  traced  in  their  origin  to  the  earliest 
times  of  which  history  makes  record,  and  checks  and 
bills  of  exchange  had  their  beginning  in  ancient  Rome, 
although  banking  in  its  modern  sense  may  be  said  to 
date  from  the  establishment  of  the  Bank  of  England  in 
1649.  "The  deposit  currency"  by  which  business  trans- 
actions are  mostly  carried  on  to-day  is  a  still  more 
modern  development.  Corporations  also  existed  in 
Rome;  but  the  limited  liability  stock  company  is  a  mod- 
ern discovery,  and,  in  connection  with  steam  and  elec- 
tricity, it  has  constituted  one  of  a  trinity  of  inventions 
that  has  revolutionized  the  world's  business.  By  its 
means  the  unit  of  commercial  enterprise  has  expanded 
from  the  neighborhood,  and  even  the  State,  to  the  di- 
mensions of  the  continent;  the  number  of  individuals, 
who  may  unite  in  the  conduct  of  an  industry,  from  three 
or  four  partners  to  60,000  to  70,000  stockholders;  and 
the  size  of  a  market  from  the  limits  of  a  single  city  to 
the  scope  of  the  world.  The  stock  company  has  enor- 
mously increased  the  opportunity  and  the  power  of  co- 
operation in  business.  The  inestimable  benefits  of  this 
co-operation  are  eagerly  desired,  while  its  power  is 
feared ;  and  thus  the  problem  of  how  best  to  subject  this 
power  to  adequate  control  without  entirely  destroying 
its  opportunities  for  good. 


2  WORK  OF  WALL  STREET  • 

Origin  of  Stock  Market. — Stock-certificates  were  a 
product  of  the  seventeenth  century.  The  first  great 
modern  company  was  the  East  India  Company,  which 
was  incorporated  in  1600.  Soon  after  that  the  Hudson 
Bay  Company  sprang  into  existence.  But  it  was  not 
until  the  latter  part  of  that  century  that  the  shares 
in  these  companies  began  to  be  actively  traded  in. 

Stock  speculation  is  therefore  a  development  of  mod- 
ern business,  although  the  taking  of  long  risks  in  trade 
is  as  old  as  commerce  itself;  and  Homer  relates  how 
after  the  combat  of  Hector  and  Ajax,  the  fleet  arriving 
from  Lemnos'  strands  discharged  cargoes  of  wine,  which 
were  sold  to  the  hosts  of  warriors  in  exchange  for  brass, 
iron,  oxen,  and  slaves.  This  was  truly  a  great  specula- 
tion. 

According  to  Macaulay,  the  term  "stock-jobbers"  was 
first  used  in  England  in  1688,  and  he  gives  an  entertain- 
ing account  of  the  beginnings  of  the  English  stock-mar- 
ket at  that  time.  A  multitude  of  new  companies,  gen- 
uine and  bogus,  were  organized,  and  an  active  specu- 
lation in  their  shares  set  in,  the  first  boom  in  industrials 
of  which  we  have  any  account.  In  1693  a  play  was 
produced  satirizing  stock-brokers.  Shakespeare,  years 
before,  had  used  the  word  "broker"  as  many  as  six 
times,  but  not  as  referring  to  dealers  in  stocks.  "Time 
bargains,"  "bulls,"  "bears,"  "puts,"  and  other  techni- 
cal terms  of  speculation  were  first  used  at  the  end  of  the 
seventeenth  century  and  at  the  beginning  of  the 
eighteenth.  So  large  became  the  unorganized  market 
for  securities,  that  in  1697  Parliament  enacted  a  law  to 
check  the  evils  of  speculation,  and  providing  a  system 
of  licenses  for  brokers.  Three  or  four  years  later  Daniel 
DeFoe,  in  one  of  his  pamphlets,  attacked  stock-job- 
bing. 

The  First  Stock  Panics. — This  early  mania  for  stock 


EVOLUTION  OF  WALL  STREET  3 

speculation  reached  its  height  at  nearly  the  end  of  the 
first  quarter  of  the  eighteenth  century,  in  the  promo- 
tion of  the  South  Sea  Company  in  England  and  of  John 
Law's  Mississippi  Company  in  France.  The  collapse  of 
these  two  bubble  companies  caused  the  world's  first 
great  panics  in  1720.  Guizot,  in  his  history,  gives  a 
short  but  interesting  account  of  the  career  of  John  Law, 
and  of  the  intense  excitement  created  in  Paris  by  his 
bold  financial  conceptions.  It  was  found  necessary  to 
close  the  entrances  to  Quincompoix  Street,  where  the 
Paris  brokers  had  their  headquarters,  in  order  to  put  a 
stop  to  the  feverish  tumult  arising  from  desperate  specu- 
lation. So  many  immense  fortunes  were  won  and  then 
lost  at  that  time  that  this  ditty  was  everywhere  sung 
in  the  streets: 

On  Monday  I  bought  share  on  share; 
On  Tuesday  I   was  a  millionaire; 
On  Wednesday  took  a  grand  abode; 
On  Thursday  in  my  carriage  rode; 
On  Friday  drove  to  the  opera  ball ; 
On  Saturday  came  to  the  pauper's  hall. 

Shortly  after  the  failure  of  John  Law  the  Paris  Bourse 
was  legally  founded,  in  1726,  but  the  "Change  de  Paris," 
out  of  which  it  may  be  said  to  have  sprung,  had  a  history 
running  back  to  1304.* 

The  English  Parliament  passed  an  act  to  prevent  stock- 
jobbing in  1734,  and  forty  years  later  another  act  was 
passed  to  prevent  short  selling.  For  nearly  a  century 
the  curb  market  existed  in  'Change  Alley  in  London, 
and  on  July  5,  1773,  the  London  Stock  Exchange  was 
formed.  Thus  the  complicated  machinery  of  the  money- 
and  stock-markets,  the  banks,  the  exchanges,  and  the 

*  For  further  information  consult  E.  Vidal  on  History  and  Meth- 
ods of  the  Paris  Bourse. 


4  WORK  OF  WALL  STREET 

processes  of  speculation  are  importations  into  Wall 
Street.  This  country  has  improved,  has  Americanized 
them,  but  did  not  originate  them. 

Beginnings  of  Wall  Street. — Less  than  forty  years  after 
the  organization  of  the  London  Stock  Exchange  a  stock- 
market  began  to  develop  in  Wall  Street.  In  the  United 
States,  as  well  as  in  England,  a  craze  for  speculation  had 
sprung  up  after  the  long  war  of  the  American  Revolu- 
tion. 

The  struggle  for  independence  had  strained  the  re- 
sources of  the  colonies  to  the  utmost,  and  much  suffering 
had  been  caused  their  people.  But  with  the  revival  of 
commerce  after  the  war  better  times  set  in.  The  first 
Congress,  sitting  in  Federal  Hall,  on  Wall  Street,  had 
issued  bonds,  called  stock,  to  assume  the  war  debts  of 
the  States,  and  about  $80.000,000  of  securities  were  thus 
offered  to  the  public.  Other  stocks  had  also  been  issued. 
In  December,  1781,  the  Bank  of  North  America  had  been 
incorporated  in  Philadelphia.  Less  than  three  years 
later,  in  February,  1784,  a  meeting  of  merchants  was 
held  to  establish  the  Bank  of  New  York.  Hamilton  drew 
up  the  plan  and  constitution  of  this  bank,  the  first  to 
be  founded  in  this  city.  Among  the  places  at  which 
subscriptions  were  received  was  the  office  of  William 
Maxwell,  No.  4  Wall  Street.  In  1791  Congress  passed, 
and  Washington  signed,  Hamilton's  measure  for  the  es- 
tablishment of  the  first  United  States  Bank. 

Speculation  in  the  securities  thus  created  set  in.  Wall 
Street  became  a  market  for  them.  It  is  recorded  that 
early  in  1792  there  was  an  office  for  the  public  sale  of 
stocks  at  No.  22  Wall  Street.  A  stock  list  of  that  year 
gives  quotations  of  6  per  cent.  United  States  stock,  and 
of  the  shares  of  the  United  States  Bank  and  the  Bank  of 
North  America.  A  number  of  men  engaged  in  the  busi- 
ness of  buying  and  selling  these  stocks  on  commission. 


EVOLUTION  OF  WALL  STREET  5 

Their  favorite  meeting-place  was  near  a  buttonwood 
tree  which  stood  in  front  of  No.  68  Wall  Street.  In 
1792  Leonard  Bleeker  and  23  other  brokers,  as  a  result 
of  a  meeting  held  at  Corre's  Hotel,  entered  into  an 
agreement  "solemnly  promising  and  pledging"  them- 
selves "not  to  buy  or  sell  any  kind  of  public  stock  at  a 
less  rate  than  |  per  cent,  commission  on  the  specie  value." 
The  date  of  this  agreement  was  May  17.  This  was  the 
earliest  beginning  of  the  Stock  Exchange,  although  there 
was  no  regular  organization  until  twenty-five  years  later. 
With  this  agreement  may  be  said  to  have  begun  the 
history  of  Wall  Street  as  the  seat  of  the  Stock-Market. 

The  whole  country  then  contained  about  as  many  in- 
habitants as  the  State  of  Ohio  now.  New  York  had  a 
population  of  33,000,  and  about  3,400  dwelling-houses. 
The  settled  part  of  the  city  did  not  extend  above  Cham- 
bers Street.  Wall  Street,  so  called  from  the  old  stock- 
ade, or  wall,  that  protected  the  early  Dutch  city  from 
the  Indians,  was  in  1792  an  important  street.  The  City 
— afterward  called  the  Federal — Hall  had  been  erected 
there  in  1699,  on  the  present  site  of  the  Subtreasury, 
and  here  Washington  had  been  inaugurated  as  President 
in  1789.  Hamilton  lived  nearly  opposite,  not  far  from 
the  corner  of  Broad  Street.  The  lower  part  was  even 
then  given  up  to  trade,  but  the  upper  part  was  a  parade- 
ground  of  fashion,  and  many  leading  families  had  their 
residences  there.  Trinity  Church  then,  as  now,  stood 
on  Broadway  facing  Wall  Street. 

Organization  of  Chamber  of  Commerce. — As  early  as 
1752  the  merchants  had  a  meeting-place,  or  Exchange, 
on  Broad  Street  near  Pearl.  In  1768  the  Chamber  of 
Commerce  was  organized  in  the  long  room  of  Fraunce's 
Tavern,  a  building  still  standing;  and  it  is  of  interest 
to  note  that  questions  of  money  engaged  its  earliest  at- 
tention. In  1786  the  Chamber  protested  in  vain  against 


6  WORK  OF  WALL  STREET 

the  State  issuing  irredeemable  paper  money  as  legal  ten- 
der. In  1794  the  merchants  established  the  Tontine 
Coffee-House  on  Wall  Street,  and  this  continued  the  cen- 
ter of  the  business  life  of  New  York  until  1827.  Here 
the  stock-brokers  met  for  some  time. 

The  first  financial  machinery  required  by  the  new 
country  was  banks,  and  the  first  great  lesson  taught  by 
these  institutions,  as  has  been  well  said,  was  punctuality. 
The  value  of  time  as  an  asset  in  business  became  more 
and  more  appreciated.  The  success  of  the  Bank  of  New 
York  led  to  the  organization  of  the  Bank  of  the  Man- 
hattan Company,  in  the  starting  of  which  Aaron  Burr 
was  largely  instrumental.  From  1792  to  1801  the  num- 
ber of  banks  increased  from  3  to  23,  with  a  total  capital 
of  $33,550,000.  A  few  fire  and  marine  insurance  com- 
panies had  also  been  organized.  The  supply  of  securi- 
ties available  for  investment  and  speculation  made  there- 
fore quite  a  stock-market.  The  following  advertisement, 
which  appeared  in  the  first  issue  of  the  "Evening  Post," 
November  16,  1801,  gives  an  idea  of  the  dimensions  of 
this  market: 

PRICES  OF  STOCKS. 

6  per  Cent  Funded  Debt 98 J  per  Cent. 

3  per  Cent. .  .do do    56$  a  57 

8  per  Cent.   Loan    112$ 

6  per  Cent  Navy  Loan par. 

BANK  STOCK 

United  States  Bank   143  « 143$   p.   ct 

New- York  (dividend  off)    131$ 

Manhattan    132 

INSURANCE   SHARES. 

New-York  Insurance  Co 128  per  cent. 

Columbian....  ditto    137  a  138 

United ditto    .  ..  118  a  119 


EVOLUTION  OF  WALL  STKEET  7 

Bills  of  Exchange  at  60  days  sight. 

On  London    100  a  101  per  cent. 

On  Hamburgh    36  a  38  cts.  p.   ink.  b. 

On  Amsterdam  40  cents  per  guilder. 

E.  BENJAMIN,  Stock  and  Exclianf/e  Broker, 
November  14.  No.  50  Wall- Street. 

At  this  time  all  the  banks  and  insurance  companies 
but  one,  and  the  Chamber  of  Commerce,  were  located  in 
Wall  Street,  then,  as  now,  the  financial  center.  As  the 
banks  were  paying  15  to  18  per  cent,  dividends,  there 
was  no  small  demand  for  their  stocks.  With  the  growth 
of  the  country  and  the  rapid  settlement  of  what  is  now 
known  as  "the  Middle  West,"  which  was  then  the  fron- 
tier, new  banks  were  created,  and  the  speculation  in  their 
shares  increased.  The  history  of  Wall  Street  from  this 
time  becomes  practically  the  history  of  the  agricultural, 
industrial,  and  commercial  development  of  the  United 
States. 

Distress  in  1812. — The  banking  capital  of  the  country 
in  1812  was  more  than  $70,000,000.  In  this  year  the 
second  struggle  with  England  began,  and  the  long  clos- 
ing of  the  ports  and  the  cost  of  the  war  caused  much 
distress.  The  Government  had  difficulty  in  floating  a 
war  loan.  The  bankers  held  a  meeting  at  the  Manhattan 
Bank  on  August  22,  and  took  measures  for  their  protec- 
tion. Thus,  a  hundred  years  ago,  the  bankers  realized 
the  importance  of  concerted  action  in  financial  crises. 
During  this  panic — the  first  of  any  importance  from 
which  Wall  Street  suffered — 90  banks  in  different  parts 
of  the  country  failed.  The  war  over,  a  new  period  of  ex- 
pansion set  in.  Tne  charter  of  the  first  United  States 
Bank  having  expired,  the  second  bank  of  that  name  was 
incorporated  in  1816,  and  for  nearly  a  quarter  of  a  cen- 
tury this  institution  virtually  controlled  the  course  of 
the  markets. 

Organization  of  the  Stock  Exchange. — Speculation  in 
3 


8  WORK  OF  WALL  STREET 

X 

bank  stocks  had  become  so  extensive  that  it  was  neces- 
sary to  organize  the  stock-market  into  an  exchange,  and 
in  1817  the  brokers  who,  until  then,  had  been  working 
under  the  agreement  of  1792,  formed  an  association  un- 
der the  name  of  the  New  York  Stock  and  Exchange 
Board.  This  was  the  second  great  addition  to  the 
mechanism  of  the  financial  markets,  the  first  having  been 
the  banks.  The  members  of  the  Board  agreed  not  to 
give  public  information  of  the  names  of  buyers  and  sell- 
ers of  stocks.  At  this  time  the  outstanding  Government 
securities  amounted  to  $123,000,000.  State  and  city 
bonds  had  also  been  issued,  and  many  new  banks  and 
insurance  companies  formed.  In  1818  the  records  of  the 
Exchange  show  that  29  different  issues  of  securities  were 
dealt  in,  including  the  stocks  of  10  banks  and  13  insur* 
ance  companies.  A  big  speculation  was  for  years  car- 
ried on  in  the  stock  of  the  United  States  Bank. 

In  1807  Robert  Fulton  succeeded  in  applying  steam- 
power  to  navigation  on  the  Hudson  River.  This  achieve- 
ment, together  with  the  digging  of  canals,  resulted  in  a 
wonderful  extension  of  inland  commerce.  New  com- 
panies were  formed,  and  a  further  expansion  of  the 
stock-market  took  place.  In  New  York  alone,  companies 
having  a  capital  of  $52,000,000  were  organized  in  1824. 
In  the  same  year  624  new  stock  companies  were  incor- 
porated in  Great  Britain.  There  was  speculation  in  New 
York  not  only  in  stocks  but  in  bonds,  mines,  and  cotton. 
The  mechanism  of  Wall  Street  had  to  be  enlarged.  In 
1820  the  constitution  of  the  Stock  Exchange  was  revised. 
Definite  rates  of  commission  for  Government  bonds, 
stocks,  mortgage  loans,  and  foreign  and  domestic  ex- 
change were  adopted.  A  rule  of  the  Exchange  prohibited 
fictitious,  or  what  are  now  called  "wash,"  sales.  In 
1821,  when  the  Morris  Canal  shares  were  offered  to  the 
public,  they  were  subscribed  for  twenty  times  over. 


EVOLUTION  OF  WALL  STEEET  9 

The  newspapers  began  to  devote  considerable  space  to 
Wall  Street.  The  Daily  Advertiser  of  April  10,  1822, 
referring  to  the  news  just  arrived  by  ship,  that  the 
British  5s  were  to  be  reduced  to  4  per  cents,  expressed 
regret  that  the  price  of  our  stocks  should  be  regulated  by 
the  jobbers  of  'Change  Alley  in  London. 

Commercial  Supremacy  of  New  York. — The  completion 
of  the  Erie  Canal  in  1825  established  the  commercial 
supremacy  of  New  York  in  the  western  hemisphere.  Up 
to  this  time  Philadelphia  had  been  the  chief  market  of 
the  country.  There,  as  has  been  seen,  the  first  bank  was 
organized  in  1781.  There  were  the  headquarters  of  the 
all-powerful  United  States  Bank,  under  the  eventful  pres- 
idency of  the  brilliant  Nicholas  Biddle.  There  also,  very 
early  in  the  nineteenth  century,  the  first  American  Stock 
Exchange  was  formed,  with  Matthew  McConnell  as  pres- 
ident, in  the  old  Merchants'  Coffee-House.  It  is  related 
that  before  the  New  York  Exchange  was  established  the 
brokers  sent  a  delegation  to  Philadelphia  to  get  a  copy 
of  the  constitution  of"  its  Exchange,  and  information  as 
to  its  methods  of  business.  But  New  York  soon  forged 
to  the  front.  Its  population  and  commerce  outstripped 
Philadelphia's,  and  the  power  of  its  banks  and  stock- 
market  was  felt  in  all  the  land.  London  bankers  began 
to  establish  branch  houses  in  Wall  Street.  In  1825  the 
still  existing  house  of  Brown  Brothers  &  Company  was 
formed  there,  as  an  offshoot  of  Alexander  Brown  &  Sons 
of  London.  In  1837  the  Rothschilds  appointed  August 
Belmont  as  their  representative  in  New  York,  a  connec- 
tion their  successors  have  maintained  ever  since. 

Railroad  Securities. — The  Stock  Exchange  in  1827 
moved  into  the  Merchants'  Exchange  Building,  which 
had  just  been  erected  on  the  site  where  the  City 
Bank  now  stands.  The  city  had  then  a  population  of 
nearly  200,000.  There  were  16  banks,  and  the  local 


10  WORK  OF  WALL  STREET 

branch  of  the  United  States  Bank  occupied  the  building 
where  is  now  the  Assay  Office.  Two  events  occurred  in 
1829  of  supreme  importance  to  Wall  Street.  One  was 
the  inauguration  of  Jackson,  who  immediately  began  his 
memorable  war  on  the  United  States  Bank.  The  other 
was  the  application  of  steam  to  land  transportation. 
The  first  train  moved  by  a  locomotive  was  operated  in 
that  year.  By  1830  the  railroad  mileage  became  30,  and 
eleven  years  later  it  amounted  to  3,361.  Railroad  stocks 
immediately  became  the  object  of  speculation.  In  1830 
the  first  railroad  stock — that  of  the  Mohawk  and  Hud- 
son— was  put  on  the  Stock  Exchange  list.  Eight  years 
later  "Yankee  rails,"  as  they  were  called,  were  intro- 
duced into  the  London  market,  the  first  security  of  this 
kind  to  be  traded  in  being  the  bonds  of  the  Camden  & 
Amboy  Railroad.  American  stocks,  however,  had  long 
before  that  time  been  speculated  in  in  London.  The 
official  list,  according  to  Charles  Duguid,  contained  the 
names  of  about  60.  The  panic  of  1837  ended  the  exist- 
ence of  most  of  them.  A  New  York  paper  of  August 
3,  1835,  printed,  as  news,  the  London  quotations  of  15 
American  stocks  on  June  23.  Investment  and  specula- 
tion in  railroad  securities  now  became  the  chief  busi- 
ness of  "Wall  Street,  and  have  so  continued  until  this 
day,  although  the  "industrials"  are  pressing  them  in  the 
race  for  supremacy. 

Panic  of  1837. — The  fierce  struggle  between  Jackson 
and  the  United  States  Bank,  culminating  in  the  panics 
of  1837  and  1839,  makes  one  of  the  most  interesting 
chapters  in  the  political  and  financial  history  of  the  coun- 
try. During  the  ten  years  from  1830  to  1840,  Wall  Street 
was  the  scene  of  much  excitement  and  turmoil.  The 
speculation  of  that  period  was,  in  proportion  to  the  re- 
sources of  the  country,  as  active  as  that  of  the  present 
time.  There  were  daring  operators  then  as  now.  Jacob 


EVOLUTION  OF  WALL  STREET 


11 


Barker,  for  instance,  undertook  in  1834  to  insure  the 
non-removal  of  Government  deposits  from  the  United 
States  Bank  until  Congress  should  meet.  He  demanded 
a  premium  of  25  per  cent.  A  corner  in  Morris  Canal 
and  Bank  stock  in  1835  was  the  talk  of  the  town.  In 
July  and  August  of  the  same  year  64,000  shares  of  the 
Harlem  stock  were  sold  for  future  delivery,  although  the 
actual  issue  of  stock  was  only  $7,000. 

The  newspapers  now  began  to  pay  much  attention  to 
the  transactions  in  "Wall  Street,  and  regular  market  re- 
ports appeared.  On  May  13,  1835,  the  Herald  then 
published  at  No.  20  Wall  Street,  contained  the  follow- 
ing: 


Stocks — Yesterday  the  fancy  stocks  took  a  tumble  of  from  2  to 
4  per  cent  on  some  descriptions,  the  railroads  especially. 
Money  is  beginning  to  get  scarce,  and  there  is  some  fear  that 
the  banks  mean  to  curtail.  This  impression  does  not  prevail 
generally. 

SALES  AT  THE  STOCK  EXCHANGE 

110  shares  East  River  Insurance   99 

25  Manhattan  Gas  Company 129  J 

50  '  "  "        on    time 100 

150  Mohawk   Railroad  Company    126 

500  Utica   and   Schenectady,   opening 128 

350  "  "  "  "        128J 

250  Jamaica  Railroad    189 

25  United    States    Bank    112J 

160  Union    Bank    122 

40  "  "        121f 

100  Delaware   and   Hudson    112J 

450  " 

200  " 

310  Harlem    Rai  road    106 

550  "  '  105i 

100  "  '  105i 

200  "  '  105i 

51  Dry    Dock    Bank 150 

50  "         "  "       149J 

Six  days  later  the  same  paper  said: 
A  most  active  business  is  doing  in  stocks.     The  small  bite  of 


12  WORK  OF  WALL  STREET 

English  news — the  probability  of  stable  government  on  the  re- 
form principles — has  given  additional  confidence  to  our  moneyed 
men. 

The  next  week  the  same  writer  informs  us: 

Stocks  went  up  generally  yesterday  2  to  3  per  cent.  No  cause 
is  assigned.  The  chief  of  the  Hebrew  interest  dipped  deeply. 
It  is  said  his  deposits  amounted  to  $500,000  a  day — a  second 
Rothschild,  truly.  The  bears'  turn  to-day.  The  United  States 
Bank  increased  its  loans  nearly  $2,000,000  during  the  month  of 
April,  whereat  the  Washington  Globe  lets  off  a  large  quantity 
of  thunder.  No  one  will  complain  at  money  being  plenty,  but 
when  the  day  of  payment  comes  it  is  almighty  awful. 

The  sales  of  June  26  were  "very  large."  They 
amounted  to  7,875  shares.  In  Philadelphia,  two  days  be- 
fore, the  transactions  were  2,279.  There  were  crowds  in 
Wall  Street  then  as  now.  On  March  10,  1836,  it  was  said 
that  "Wall  Street  was  impassable."  During  this  year 
the  Stock  Exchange  appointed  a  committee,  composed  of 
Messrs.  Ward,  Coit,  Nevins,  and  Le  Roy,  to  investigate 
the  recent  speculations  in  Harlem  stock,  and  it  was  said 
by  a  financial  writer  of  that  day  that  "the  system  so 
much,  indulged  in  of  late  of  time  bargains  and  cornering 
will  probably  be  sifted  to  the  bottom.  The  recent  opera- 
tions in  Morris  Canal  stock,  the  Harlem  Railroad,  and  the 
Montauk  Railroad  have  been  a  series  of  puzzles  to  the 
community,  as  much  so  as  the  roulette  table  or  the  faro- 
bank  to  the  uninitiated  in  gambling."  The  panic  of 
1837  struck  Wall  Street  the  preceding  year,  as  on  October 
23,  1836,  nearly  a  dozen  failures  were  announced  in  the 
Street.  The  panic  swept  over  the  entire  country,  and 
was  felt  as  severely  in  England  as  here.  New  York 
bankers,  at  a  meeting  May  9,  resolved  to  suspend  specie 
payments.  From  1837  to  1839  there  were  33,000  failures 
in  the  United  States  involving  a  loss  of  $440,000,000. 


EVOLUTION  OF  WALL  STREET 


13 


Jackson  triumphed  in  his  contest  with  the  United  States 
Bank.  This  institution  after  its  Federal  charter  expired, 
continued  in  business  under  a  Pennsylvania  charter,  but 
finally,  in  1841,  passed  out  of  existence  altogether. 
Philip  Hone,  in  his  diary,  says  that  the  losses  entailed 
by  the  failure  of  this  bank  equaled  even  those  of  the 
great  fire  of  December  16,  1835,  and  he  declared  it  meant 
"an  utter  destruction  of  American  credit  in  Europe." 

The  American  of  November  25,  1841,  gives  the  fol- 
lowing account  of  the  depreciation  in  prices : 

To  convey  an  idea  of  the  immense  amount  of  money  sunk  in 
stocks  within  the  last  three  years,  we  give  a  list  of  a  small  por- 
tion only  of  those  bought  and  sold  at  our  stock  board  alone: 


PBICES. 

Within  3  years 
past. 

'Present 

United  States  Bank   >.  . 

122J 

4 

Vicksburg  Bank    

89 

5 

Kentucky    Bank  

92 

56 

North  American  Trust  

95 

3 

Farmers'    Trust    

113 

30 

American    Trust    

120 

Nothing 

Illinois   State   Bank    

80 

35 

Morris  Canal  Bank   

75 

Nothing 

Mohawk   Railroad    

76 

60 

Paterson    Railroad    

75 

53 

Harlem  Railroad    

74 

18 

Stonyton    Railroad    

70 

23 

Canton  Company    

54 

23 

Long   Island  Railroad    

60 

52 

The  great  fire,  to  which  allusion  has  been  made,  de- 
stroyed 648  buildings  in  the  lower  end  of  the  city,  includ- 
ing the  Merchants'  Exchange,  in  which  the  Stock  Ex- 


14  WORK  OF  WALL  STREET 

change  had  its  Board-Room.  The  Exchange  took  up  its 
quarters  temporarily  in  Howard's  Hotel,  No.  8  Broad 
Street.  The  fire  was  followed  by  a  general  rebuilding, 
which  transformed  the  appearance  of  the  financial  dis- 
trict. Former  Mayor  Philip  Hone  walked  down  Wall 
Street,  July  13,  1842,  and  the  same  evening  recorded  his 
impressions  in  his  diary,  as  follows : 

The  Subtreasury  Building. — The  splendid  edifice  fronting  on 
Wall  and  Pine  Streets  is  now  entirely  completed,  and  has  been 
occupied  as  the  New  York  Custom  House,  in  all  its  manifold 
and  complicated  departments,  since  the  1st  of  May.  The  build- 
ing was  commenced  in  May,  1834,  and  the  edifice  furnished  with 
its  furniture  completed  in  May,  1842;  cost,  $985,000.  The  state- 
ment of  the  cost  of  this  magnificent  winding-sheet  of  departed 
commerce  is  taken  from  an  elaborate  and  well-written  descrip- 
tion published  in  the  Commercial  Advertiser  of  this  afternoon. 
A  stranger  walking  down  Wall  Street  from  Broadway  would 
laugh  heartily  at  these  lugubrious  expressions  of  mine.  With 
his  back  to  "New  Trinity,"  the  most  beautiful  structure  of  stone 
in  America,  he  passes  the  Custom  House,  which  cost  $1,000.000, 
eight  or  ten  banks,  each  a  palace  for  the  worship  of  Mammon, 
and  the  Exchange  with  a  portico  of  granite  columns  such  as  Sir 
Christopher  Wren  had  no  notion  of.  These,  with  the  brokers' 
offices  and  the  seats  of  money-changers,  some  of  which  cost  enor- 
mous sums,  would  convey  to  the  mind  of  the  wayfaring  man  an 
image  wholly  different  from  that  of  commercial  distress  and 
pecuniary  embarrassment. 

"New  Trinity,"  of  which  Mr.  Hone  speaks,  has  be- 
come "Old  Trinity."  The  "New  Custom  House"  is  now 
the  Subtreasury.  The  Merchants'  Exchange,  which  later 
became  the  home  of  the  Custom  House,  has  now  been 
completely  transformed  into  the  City  Bank,  and  the  seat 
of  customs  is  removed  to  the  great  building  at  Bowling 
Green. 

New  Birth  of  Wall  Street. — Mr.  Hone's  expressions 
were  indeed  lugubrious;  and  posterity,  which  would  not 
think  of  laughing  at  him,  laughs  at  them.  For,  even  as 


EVOLUTION  OF  WALL  STREET  15 

Mr.  Hone  wrote,  the  new  birth  of  Wall  Street  had  taken 
place.  Through  the  labor  of  panic  and  the  baptism  of 
fire,  it  was  now  rapidly  growing  into  the  stature  and 
character  of  to-day.  Wall  Street  soon  became  no  longer 
a  mere  street.  Its  name  covered  a  district.  The  business 
of  the  stock-  and  money-markets  began  to  overflow  Wall 
into  Broad,  New,  and  other  neighboring  streets.  The  fall 
of  the  United  States  Bank  had  brought  to  an  end  all 
pretensions  of  Philadelphia  to  supremacy  in  the  financial 
markets.  In  the  convention  of  bankers  held  in  April, 
1838,  to  consider  the  business  situation,  the  New  York 
bankers  displayed  the  greatest  spirit  and  courage.  The 
convention  decided  to  resume  specie  payments  the  fol- 
lowing January,  but  the  New  York  banks  resumed  May 
16.  "New  York,"  says  Prof.  W.  G.  Sumner,  writing  of 
this  time,  "adopted  the  policy  of  severe  contraction, 
prompt  liquidation,  and  speedy  recommencement.  Phila- 
delphia adopted  that  of  relaxation,  indulgence,  delay,  and 
prolonged  liquidation."  It  was  in  1838  also  that  the 
State  of  New  York  abolished  the  practice  of  special  char- 
ters for  banks,  which  had  given  rise  to  so  many  scandals 
and  abuses,  and  adopted  its  admirable  free  banking  law, 
that  became  the  model  on  which,  nearly  a  generation 
later,  the  National  Banking  Act  was  drafted.  The 
Evening  Post  of  April  18,  1838,  said  in  an  editorial, 
that  this  law  "puts  up  a  barrier  against  the  practice 
of  banking  by  special  charters  which  we  trust  will  never 
be  removed."  From  this  time  the  financial  supremacy 
of  Wall  Street,  in  this  country,  has  never  been  shaken. 
In  1842,  Morse,  who  seven  years  earlier  had  invented 
a  recording  instrument,  built  a  submarine  cable  from 
Governor's  Island  to  the  Battery.  Two  years  later,  in 
1844,  the  first  land  telegraph-line  was  constructed. 
Hardly  any  other  event  has  added  more  to  the  influence 
of  Wall  Street.  In  this  same  year  was  formed  the  law 


16  WORK  OF  WALL  STREET 

firm  of  Charles  E.  Butler  and  William  M.  Evarts,  which 
has  ever  since  been  one  of  the  notable  institutions  of  the 
Street,  and  which  was  one  of  the  first  of  the  class  of 
corporation  law  firms  that  have  now  become  an  indis- 
pensable part  of  the  Street's  machinery. 

The  Subtreasury  System. — With  the  fall  of  the  United 
States  Bank  there  was  a  change  in  the  financial  policy  of 
the  Government,  leading,  in  1846,  to  the  establishment 
of  the  Subtreasury  system  which  exists  to-day,  although 
now  the  foremost  financiers  are  advocating  its  abolition. 
The  first  Subtreasury  was  opened  on  Wall  Street  in  this 
year. 

Bank  Clearing-House. — In  1853  the  Bank  Clearing- 
House  was  organized,  being  first  located  at  No.  14  Wall 
Street.  This  has  increased  the  facilities  of  Wall  Street 
and  augmented  its  safeguards  as  has  no  other  part  of 
its  mechanism.  In  the  same  year  the  Assay  Office  was 
established;  and  the  Corn  Exchange,  the  forerunner  of 
the  present  Produce  Exchange,  was  incorporated. 

The  discovery  of  gold  in  California  and  Australia  in- 
creased the  world 's  wealth  so  much  that  there  was  an  im- 
mense expansion  in  investment  and  speculation.  Rail- 
road construction  proceeded  at  a  rapid  rate;  money 
poured  into  the  banks,  and  the  banks  lent  their  credit 
to  the  promotion  of  new  enterprises  and  new  companies. 
Instead  of  "an  utter  destruction  of  American  credit  in 
England,"  it  is  computed  that  the  amount  of  American 
stocks  held  abroad  in  1852  represented  a  value  of 
$261,000,000. 

At  this  time  the  methods  of  the  Stock  Exchange  were 
primitive  as  compared  with  those  of  to-day.  Each  mem- 
ber of  the  Board  had  his  seat,  and  old  cuts  show  that 
the  wearing  of  tall  hats  was  the  fashion  among  brokers. 
Much  business  was  transacted  in  the  Exchange  and  on 
the  curb.  The  Bankers'  Magazine  of  November  24, 


EVOLUTION  OF  WALL  STREET  17 

1856,  reported  that  "the  aggregate  transactions  during 
the  past  four  weeks  were  exceedingly  large,  aggregating 
nearly  one  million  shares." 

Panic  of  1857. — But  overspeculation,  following  the 
enormous  production  of  gold,  and  the  abuses  of  credit 
in  the  promotion  of  new  railroad  and  other  companies, 
together  with  tariff  disturbances,  brought  on  the  panic 
of  1857,  which  a  writer  of  the  period  said  "was  an  explo- 
sion without  adequate  cause  or  premonition."  This  was 
precipitated  by  the  failure  of  the  Ohio  Life  and  Trust 
Company,  a  Cincinnati  concern  having  a  branch  office 
in  Wall  Street.  It  had  made  large  advances  to  "Western 
railroads.  A  few  men  still  active  in  Wall  Street  remem- 
ber August  24, 1857,  when  this  institution  closed  its  doors. 
"The  failure,"  said  the  Herald  of  that  day,  "took  the 
Street  by  surprise.  While  the  public  were  looking  for 
collapses  among  railroad  companies,  they  seemed  to  lose 
sight  of  banking  institutions."  Two  days  later  the 
Philadelphia  Public  Ledger  said:  "The  times  are 
sadly  out  of  joint,  and  the  effects  of  a  bad  system  are 
daily  developing  themselves.  The  banks  have  been  car- 
rying full  sail,  the  country  has  been  importing  and  in- 
dividuals living  far  in  advance  of  capital  and  produc- 
tion." The  New  York  Times  declared  that  "the  New 
York  Stock  Exchange  as  at  present  managed  is  little  more 
than  an  enormous  gambling  establishment,"  which  re- 
minds one  of  some  of  the  indiscriminate  attacks  made  on 
Wall  Street  at  the  present  time.  All  the  banks,  except 
the  Chemical,  suspended  specie  payments  October  14,  but 
resumed  two  months  later.  Wall  Street  was  shaken  by 
the  shock.  From  August  22  to  October  13,  Reading  de- 
clined 40  per  cent.,  Delaware  &  Hudson  40,  Illinois  Cen- 
tral bonds  48,  Park  Bank  stock  44,  American  Exchange 
Bank  55J.  The  size  of  the  stock-market  is  shown  by 
the  sale  of  nearly  71,000  shares  in  one  day. 


18  WORK  OF  WALL  STREET 

During  the  Civil  War. — During  the  whole  period  of  the 
Civil  War  Wall  Street  was  like  a  boiling  lake  of  excited 
speculation.  The  financial  situation  became  so  strained 
that  even  before  Lincoln's  inauguration  the  bankers  met 
at  the  Subtreasury  and  resolved  to  suspend  specie  pay- 
ments. The  first  issue  of  Clearing-House  loan  certificates 
was  made  at  this  time,  and  from  1860  to  1864  a  total  of 
$59,159,000  were  issued,  the  largest  amount  outstanding 
at  one  time  being  $21,960,000  in  1862.  Before  the  war 
was  opened  the  National  debt  was  under  $65,000.000,  but 
in  1866  it  amounted  to  $2,773,000,000.  This  enormous 
issue  of  bonds  was  floated  for  the  most  part  in  Wall 
Street,  and  this  was  the  most  extraordinary  of  all  the 
legitimate  achievements  of  the  market.  The  credit  of  the 
country  was  so  low  that  it  was  very  difficult  to  float  the 
first  loan.  The  Chamber  of  Commerce  issued  an  appeal 
to  capitalists  to  invest  in  the  bonds,  and  Secretary  Chase 
visited  the  Street  and  conferred  with  bankers  in  the  in- 
terests of  the  loan.  In  the  course  of  the  war  the  Legal- 
Tender  Act  was  passed,  and  in  1863  the  present  National 
banking  system  was  established — the  first  National  bank 
being  founded  in  June  of  that  year.  To  the  National 
Banking  Act,  which  made  New  York  a  central  reserve 
city  where  half  the  reserves  of  the  banks  in  the  rest 
of  the  country  could  be  kept  on  deposit,  Wall  Street  owes 
no  small  share  of  its  present  power.  It  has  augmented 
vastly  its  financial  resources. 

At  the  outbreak  of  the  war  the  Stock  Board  was  still  a 
close  corporation,  conducting  its  operations  in  secret. 
Quotations  were  carried  by  hand  from  office  to  office. 
Each  member  had  a  particular  seat  in  the  Board-Room; 
there  were  less  than  a  hundred  members  in  attendance, 
and  on  account  of  persistent  blackballing  it  was  hard 
to  get  elected  to  the  membership.  Speculation  over- 
flowed the  regular  Board.  The  curb  market  became  very 


EVOLUTION  OF  WALL  STREET  19 

active.  An  unofficial  adjunct  to  the  Board  was  started 
in  the  next  room,  and  there  were  extensive  arbitrage 
dealings  between  them.  The  market  opened  on  the  Street 
at  eight  o  'clock  and  continued  all  through  the  day  down- 
town, and  at  night  in  the  corridors  of  the  Fifth  Avenue 
Hotel,  and  at  a  later  period  at  an  evening  exchange.  As 
the  war  progressed  the  speculation  grew,  and  the  total 
sales  from  early  morning  until  midnight  were  on  an  enor- 
mous scale.  At  this  time  the  rate  of  commission  was 
reduced  from  |  to  £  of  1  per  cent.  In  1865  the  Exchange 
prohibited  its  members  from  attending  the  up-town  night 
exchange.  Meanwhile  so  large  was  the  trading,  and  so 
exclusive  the  regular  Exchange,  that  in  1864  the  Open 
Board  of  Brokers  was  organized,  and  continued  in  ex- 
istence until  1869,  when  consolidation  with  the  old  Board 
took  place,  creating  the  present  Stock  Exchange  with  its 
admirable  system  of  government  and  rules  for  the  trans- 
action of  business. 

Speculation  in  Gold. — Gold  became  the  football  of 
speculation.  The  first  premium  on  gold  was  quoted  in 
January,  1862,  and  it  was  immediately  dealt  in  the  same 
as  stocks.  The  Government  tried  in  vain  _  to  prohibit 
speculation  in  the  metal.  Speculation  in  gold  was 
branded  as  unpatriotic,  but  to  no  purpose.  Legislation 
was  enacted  by  both  the  State  and  the  United  States  in 
1863  to  prohibit  the  banks  from  lending  money  on  gold 
or  bills  of  exchange,  and  in  1864  Congress  prohibited 
transactions  in  gold  except  for  strictly  cash  delivery  at 
the  regular  offices  of  those  dealing  in  it.  But  restrictive 
measures  served  only  to  advance  the  premium  and  failed 
to  stop  speculation,  and  the  laws  were  repealed.  In  1864 
the  Gold  Exchange  was  organized.  The  same  year,  to 
facilitate  deliveries,  the  Bank  of  New  York  arranged  for 
special  gold  deposits,  checks  on  which  became  good  de- 
liveries for  sales  of  gold.  Three  years  later  the  Gold 


20  WORK  OF  WALL  STREET 

Exchange  Bank  was  organized  as  the  Clearing-House  for 
gold  transactions.     The  Gold  Exchange  continued  until 

1877.  All  speculation  in  gold  ceased  on  the  resumption 
of  specie  payments  in  1879. 

"When  it  is  remembered  that  the  immense  business  trans- 
acted during  the  war  period  was  done  without  the  aid  of 
the  stock-indicator,  the  telephone,  the  cable,  and  the  Stock 
Clearing-House,  there  is  good  cause  for  astonishment. 
Stock-Exchange  records  of  complete  stock  transactions 
go  back  only  to  1875.  Before  that  only  sales  on  calls 
were  reported.  In  1868  the  official  sales  on  call  at  the 
two  Boards  were  19,713,402  shares  of  stocks  and 
$245,245,240  par  value  of  bonds,  but,  according  to  a  con- 
temporary estimate,  these  sales  only  represented  one- 
tenth  of  the  total  speculation  of  the  Street,  which  there- 
fore amounted  to  more  than  $20,000,000,000  a  year. 
Comparing  this  with  the  records  of  1906,  when  the  trans- 
actions in  stocks  and  bonds  aggregated  about  $30,000,- 
000,000,*  it  is  seen  that  speculation  a  generation  ago  was 
exceedingly  active. 

Tickers  and  Telephones. — It  was  not  until  July,  1866, 
that  Cyrus  W.  Field  finally  succeeded  in  his  cable  enter- 
prise, and  in  the  following  month  London  prices  began 
to  be  regularly  received  by  cable  in  New  York.  Arbi- 
trage transactions  soon  started.  The  next  year  the  stock- 
indicator  was  adopted.  Telephones  were  introduced  in 

1878.  The  Stock  Clearing-House  was  established  in  1892, 
this  being  undoubtedly  the  most  important  contribution 
to  the  mechanism  of  the  Street  since  the  organization  of 
the  Bank  Clearing-House  forty  years  earlier.     It  has  ex- 
panded indefinitely  the  facilities  of  the  stock-market. 


•  These  figures  for  1906  represent  the  transactions  of  the  New 
York  Stock  Exchange.  The  speculation  in  the  Consolidated  Stock 
Exchange,  on  the  "curb,"  and  in  the  bucket  shops  should  be  added 
to  make  the  comparison  with  1868  more  accurate. 


EVOLUTION  OF  WALL  STREET  21 

Modern  Wall  Street. — With,  the  consolidation  of  the 
Stock  Exchange  and  the  Open  Board  of  Brokers  in  1869, 
we  enter  upon  the  history  of  Wall  Street  practically  as 
it  exists  to-day.  Although  more  than  a  generation  has 
passed,  thirty-seven  of  the  present  members  of  the  Ex- 
change were  elected  in  or  before  that  year.  The  purpose 
of  this  book  is  to  describe  the  present  rather  than  the 
past;  but  since  it  is  necessary  to  know  something  of  its 
history  in  order  to  understand  the  work  of  Wall  Street, 
this  sketch  of  the  beginnings  of  its  stock-  and  money- 
markets  is  given.  But  the  events  of  the  past  forty-three 
years  can  only  be  touched  upon  lightly. 

The  theme  is  indeed  a  tempting  one.  The  period  is 
crowded  with  dramatic  episodes.  Mighty  enterprises 
have  been  launched.  Great  deals  have  been  planned. 
Enormous  speculations  have  been  carried  on.  Panics 
have  convulsed  the  Street.  Immense  fortunes  won  and 
lost  have  startled  the  world.  The  period  immediately 
after  the  Civil  War  was  especially  prolific  in  speculative 
sensations.  The  harvest  of  war  was  wild  extravagance, 
looseness  of  morals  in  politics  and  business,  base  frauds, 
and  crime.  But  this  period  was  also  a  time  of  recon- 
struction. The  country  put  its  shoulder  to  the  wheel  of 
industry  and  there  was  a  notable  development  of  the 
national  resources.  In  May,  1869,  the  first  railroad  train 
moved  across  the  continent.  The  Atlantic  and  the  Pa- 
cific were  united  by  bonds  of  iron.  The  Transconti- 
nental stocks  then  became  the  playthings  of  speculation. 

The  Gold  Conspiracy. — It  was  in  1869  that  the  "Gold 
Conspiracy"  took  place,  culminating  in  the  convulsion 
of  Black  Friday,  September  24,  which  was  undoubtedly 
the  most  extraordinary  day  in  Wall  Street  history.  A 
committee  of  Congress,  of  which  James  A.  Garfield  was 
chairman,  investigated  this  conspiracy,  and  its  report 
and  accompanying  testimony  constitute  the  best  account 


22  WORK  OF  WALL  STREET 

of  it.  Jay  Gould,  arguing  that  an  advance  in  the 
premium  on  gold  would  stimulate  exports  of  wheat  and 
thus  benefit  the  farmer,  believed  that  the  Treasury  would 
suspend  its  sales  of  gold,  and  this,  in  fact,  was  for  a  time 
the  Treasury  policy.  Therefore  he  got  up  a  bull  pool 
in  gold  and  advanced  the  premium  from  132  to  144. 
Other  members  of  the  pool  liquidated,  leaving  Gould  and 
his  partner,  James  Fisk,  to  carry  on  the  deal.  Gould 
was  assisted  by  the  Tenth  National  Bank,  in  which  he 
had  a  large  interest,  and  which  overcertified  his  checks 
$7,500,000  in  one  day.  Garfield  called  this  bank  "A 
Manufactory  of  Certified  Checks."  There  was  a  bold 
and  wicked  attempt  to  connect  the  Grant  Administra- 
tion with  the  conspiracy,  but  it  did  not  succeed.  The 
corner  was  broken  by  President  Grant  and  Secretary 
Boutwell,  who  gave  the  order  to  sell  gold.  Boutwell's 
telegram,  "Sell  four  millions  gold  and  buy  four  millions 
bonds,"  completely  shattered  the  corner.  "No  ava- 
lanche," it  was  said  by  a  writer  of  the  day,  "ever  swept 
with  more  terrible  violence  than  did  the  news  of  this 
telegram  into  the  Gold  Room."  The  excitement  rose  to 
the  highest  point.  Old  operators  lost  their  heads  and 
rushed  hatless  and  half-crazy  through  the  streets,  their 
eyes  bloodshot,  their  brains  on  fire.  New  Street  was  so 
crowded  with  excited  people  that  it  was  a  dangerous 
spot  to  stand  in.  The  price  of  gold,  which  that  morning 
had  risen  to  162£,  fell  to  133.  The  Gold  Exchange  Bank 
could  not  clear  the  gold  transactions,  which  amounted  to 
$410,000,000.  Clearances  were  suspended  for  a  month, 
and  dealings  in  gold  for  a  week.  Mr.  Gould  employed 
over  fifty  brokers  in  his  operations.  One  of  these  was 
Albert  Speyers,  whose  contracts,  amounting  to  $37,000,- 
000,  were  repudiated.  Smith,  Gould,  Martin  &  Company 
refused  to  make  out  a  clearance  sheet,  but  one  was  made 
up  for  them  by  a  committee  of  the  Gold  Exchange,  which 


EVOLUTION  OF  WALL  STREET  23 

showed  that  they  received  $20,630,000  gold  and  delivered 
$7,500,000,  leaving  $13,130,000  to  be  paid  for. 

"The  malign  influence  which  Catiline  wielded  over  the 
reckless  and  abandoned  youth  of  Rome, ' '  said  Garfield  in 
his  report,  "finds  a  fitting  parallel  in  the  power  which 
Fisk  held  in  Wall  Street,  when,  followed  by  the  thugs 
of  Erie  and  the  debauchees  of  the  opera,  he  swept  into 
the  Gold  Room  and  defied  both  the  Street  and  the  Treas- 
ury. ' ' 

It  was  Black  Friday  that  inspired  E.  C.  Stedman,  the 
banker-poet  of  the  Street,  to  write  his  much-quoted  poem 
beginning : 

Zounds !  How  the  price  went  flashing  through 

Wall  Street,  William,  Broad  Street,  New ! 

All  the  specie  in  all  the  land 

Held  in  one  Ring  by  a  giant  hand — 

For  millions  now  it  was  ready  to  pay  * 

And  throttle  the  Street  on  Hangman's  day. 

The  Erie  Wars. — The  Erie  wars  provided  for  years  the 
chief  sensation  of  Wall  Street.  Erie,  Northern  Pacific, 
and  Reading  have  indeed  been  the  objects  of  more  specu- 
lation, the  cause  of  more  flurries  and  panics,  and  the  vic- 
tims of  more  receiverships  and  reorganizations  than  al- 
most the  entire  rest  of  the  railroad  list  put  together. 
The  history  of  Erie,  from  the  time  Daniel  Drew  entered 
the  directory  of  1852,  to  the  time  when  by  main  force 
Gould  was  driven  from  the  Presidency  in  1872,  would 
make  a  volume  of  absorbing  interest.  Charles  Francis 
Adams  made  it  the  theme  of  two  brilliant  magazine  ar- 
ticles soon  after  the  events  happened.  Drew  was  in  con- 
trol of  the  road  until  1868.  For  years  Commodore  Van- 
derbilt,  who  had  obtained  control  of  the  Harlem,  the  Hud- 
son, and  the  New  York  Central  Railroads,  fought  desper- 
ately with  Drew  in  the  legislature,  the  courts,  and  the 
4 


24  WORK  OF  WALL  STREET 

stock-market  for  the  mastery  of  Erie.  In  1868  Drew 
lost,  but  Vanderbilt  did  not  gain,  control.  The  road  then 
passed  into  the  hands  of  Gould,  who  for  four  years  made 
it  the  plaything  of  his  Wall  Street  operations. 

"Freebooters,"  wrote  Mr.  Adams,  "are  not  extinct. 
Gambling  is  a  business  now  where  formerly  it  was  a  dis- 
reputable excitement.  Cheating  at  cards  was  always  dis- 
graceful. Transactions  of  a  similar  nature,  under  the 
euphemistic  names  of  operating,  cornering,  and  the  like, 
are  not  so  regarded."  During  these  twenty  years  of 
poor  Erie's  history  securities  were  issued  by  the  bushel, 
legislative  bribery  was  freely  resorted  to,  law  was  made 
another  name  for  plunder,  legal  pandemonium  existed, 
the  courts  ran  riot.  Injunctions  and  counter  injunctions 
were  issued.  In  the  final  uprising  of  the  people  that  fol- 
lowed this  period  of  rottenness  in  politics  and  business, 
two  corrupt  judges  were  driven  from  the  bench.  The 
Drew  trick  of  issuing  new  stock  and  flooding  the  market 
with  it,  and  then  by  various  expedients  preventing  its 
transfer  on  the  books,  so  as  still  to  keep  control  of  the 
property,  was  copied  by  Gould,  a  greater  master  of  specu- 
lation than  even  he.  "This,"  said  Adams,  "is  the  most 
extraordinary  feat  of  financial  legerdemain  which  history 
has  yet  recorded."  The  Stock  Exchange  finally  made 
a  rule  requiring  shares  of  companies  to  be  registered,  in 
order  to  prevent  a  repetition  of  this  scandal,  but  Gould 
at  first  refused  to  comply  with  it,  and  Erie  was  for  a  time 
struck  from  the  list.  After  Mr.  Gould  was  driven  from 
the  Presidency  under  a  revolt  inspired  chiefly  by  Eng- 
lish stockholders,  he  was  sued  for  $9,700,000,  which  it 
was  claimed  he  had  converted  to  his  own  use  from  the 
assets  of  the  road.  Mr.  Gould  was  under  arrest  for  a 
short  time,  and  finally  made  his  famous  "restitution," 
turning  over,  besides  some  valuable  real  estate,  securities 
nominally  worth  $6,000,000,  but  which,  it  was  later  re- 


EVOLUTION  OF  WALL  STREET  25 

lated  under  oath  to  the  Hepburn  Railroad  Committee, 
were  not  really  worth  over  $200,000. 

Panic  of  1873. — General  Grant  said,  in  1869,  that  he 
thought  there  was  a  ' '  fictitiousness  about  the  prosperity 
of  the  country,"  and  he  was  right;  but  the  collapse  did 
not  come  until  four  years  later.  The  panic  of  1873  was 
precipitated  by  the  failure  of  Jay  Cooke,*  the  promoter  of 
the  Northern  Pacific,  and  it  caused  the  greatest  distress 
throughout  the  country.  Its  severity  in  Wall  Street  is 
shown  by  the  fact  that  the  Stock  Exchange  closed  its 
doors  for  ten  days,  and  that  there  were  seventy-nine 
stock  failures.  A  long  period  of  stagnation  succeeded, 
but  in  1879  the  memorable  boom  that  followed  the  re- 
sumption of  specie  payments  was  in  full  swing,  and  was 
checked  only  by  the  assassination  of  Garfield  in  1881. 

Panic  of  1884.— Wall  Street  suffered  most  from  the 
panic  of  1884,  although  its  effects  were  to  a  considerable 
extent  felt  throughout  the  country.  This  started  with 
the  failure  of  Grant  &  Ward  and  the  Marine  Bank,  due 
to  the  dishonesty  of  Ferdinand  Ward,  the  partner  of 
General  Grant.  These  were  followed  a  few  days  later 
by  the  suspension  of  the  Metropolitan  Bank  and  George 
I.  Seney.  A  remarkable  incident  of  this  panic  was  the 
failure  of  A.  S.  Hatch,  then  President  of  the  Stock  Ex- 
change. A  special  election  to  fill  Mr.  Hatch's  place  had 
to  be  held  in  the  midst  of  the  excitement,  resulting  in  the 
selection  of  J.  Edward  Simmons,  who  piloted  the  Ex- 
change through  the  ensuing  months  of  severe  strain. 

In  1890  a  world-wide  blow  to  credit  was  caused  by  the 
suspension  of  the  Barings,  of  London,  a  blow  more  disas- 

*  The  night  before  his  failure  Mr.  Cooke  entertained  President 
Grant  at  his  house  near  Philadelphia.  Unaware  apparently  of  the 
peril  of  his  situation,  the  next  morning  he  drove  the  President  to 
the  railroad  station  and  then  went  to  his  office,  where  he  discovered 
that  he  was  a  bankrupt.  The  annals  of  American  business  may  be 
searched  in  vain  for  a  more  dramatic  personal  incident  than  this. 


26  WORK  OF  WALL  STREET 

trous  even  than  that  of  the  failure  of  Overend,  Gurney  & 
Co.  in  1866.  There  was  a  year  of  prosperity  in  1892,  but 
the  next  year  a  great  commercial  panic  set  in  as  the  re- 
sult of  the  free  silver  agitation. 

Panic  of  1893. — In  the  stock-market,  the  first  notable 
event  of  1893  was  the  collapse  of  the  McLeod  Reading 
Combination.  This  had  been  formed  in  1892,  and  on  the 
llth  of  February  of  that  year  there  had  been  a  bull  day 
in  Reading  which  advanced  to  65,  with  sales  of  592,000 
shares,  the  total  transactions  of  all  stocks  reaching  1,446,- 
915  shares,  which  for  nearly  seven  years  remained  the 
"record"  for  one  day's  trading.  But  February  20,  1893, 
the  combination  went  to  pieces ;  Reading  fell  to  28£,  and 
the  day's  sales  amounted  to  1,438,971  shares,  of  which 
957,955  were  Reading.  On  May  3  there  was  a  heavy  fall 
of  stock  prices,  and  the  next  day  the  collapse  in  Cordage 
caused  three  failures. 

The  events  of  the  panic  of  1893  do  not  call  for  recapitu- 
lation in  detail  here,  though  they  should  receive  the 
earnest  study  of  every  investigator  of  financial  history. 
For  many  months  the  Treasury  was  on  the  ragged  edge 
of  suspension  of  gold  payments.  The  National  debt  had 
to  be  increased  in  order  to  buy  gold.  Europe  dumped 
her  heavy  load  of  American  securities  on  our  market. 
Prices  of  all  stocks  collapsed  like  houses  of  cards.  Thir- 
teen stock-exchange  houses  suspended,  and  there  were 
more  than  15,000  commercial  failures.  Only  the  Clear- 
ing-House  Loan  Committee,  composed  of  Frederick  D. 
Tappen,  E.  H.  Perkins,  Jr.,  J.  Edward  Simmons,  Henry 
"W.  Cannon,  W.  A.  Nash  and  G.  G.  Williams,  stood  be- 
tween the  business  of  the  country  and  universal  bank- 
ruptcy. Wall  Street  never  performed  a  more  valuable 
service  for  the  country. 

Panic  of  1895. — President  Cleveland's  so-called 
Venezuelan  message  produced  the  Wall  Street  upheaval 


EVOLUTION  OF  WALL  STREET  27 

of  December,  1895.  Still  suffering  from  the  strain  of  the 
silver  problem,  with  heavy  exports  of  gold,  the  continued 
depletion  of  the  Treasury  reserve,  making  necessary  an- 
other bond  issue,  the  market  broke  under  the  added  bur- 
den of  possibility  of  war  with  England,  which  happily 
was  avoided. 

The  McKinley  Boom. — The  election  of  1896,  resulting 
in  a  victory  for  the  gold  standard,  ended  the  four  years 
of  depression  in  business,  and  the  five  years  of  what  is 
known  as  "the  McKinley  boom"  began.  Confidence  was 
restored,  the  crops  were  bountiful,  the  gold  production 
was  unprecedented,  and  marvelous  prosperity  filled  the 
land.  Even  the  Trans-Missouri  decision  of  March  22, 
1897,  which  declared  that  railroad  pooling  was  illegal, 
only  temporarily  checked  the  revival,  although  it  after- 
wards worked  great  changes  in  methods  of  railroad  con- 
trol, introducing  "communities  of  interests,"  and  hold- 
ing or  securities  companies,  with  later  still  more  impor- 
tant changes,  the  final  results  of  which  are  not  yet  de- 
termined. The  war  with  Spain,  short  and  decisive,  and 
bringing  about  the  acquisition  of  the  Philippines,  actually 
augmented  the  boom;  but  in  1899  there  was  a  reaction 
caused,  first  by  ex-Governor  Flower's  sudden  death,  and 
late"r  by  the  Boer  War  and  the  closing  of  the  Transvaal 
mines.  The  passage  of  the  Gold  Standard  Law  of  1900 
was  the  legitimate  consequence  of  the  verdict  of  the  peo- 
ple rendered  four  years  before,  and  which  was  confirmed 
by  the  re-election  of  McKinley.  All  previous  records  of 
bank  clearings,  stock  and  bond  transactions,  exports, 
manufactured  products  and  volume  of  trade,  were 
broken  in  1901.  The  high-water  mark  both  of  Wall 
Street  speculation  and  busine*ss  prosperity  was  then 
reached.  A  strike  of  steel  operators,  a  short  corn  crop, 
the  contest  for  the  control  of  the  Northern  Pacific,  end- 
ing in  the  stock  panic  of  May  9,  and  the  assassination  of 


28  WORK  OF  WALL  STREET 

McKinley,  any  one  of  which,  under  other  and  ordinary 
conditions,  might  have  spelled  National  disaster,  did  not 
materially  disturb  business  interests,  and  only  partially 
reduced  the  volume  of  speculation. 

New  giants  had  appeared  in  the  speculative  arena  dur- 
ing this  boom — men  of  daring,  of  originality,  and  of  that 
gift  of  imagination  which  is  as  essential  to  the  highest 
success  in  finance  as  it  is  in  art,  music,  and  literature. 
An  era  of  big  things  opened  for  Wall  Street.  Great  in- 
dustrial companies  were  formed.  Practically  every  large 
business  was  incorporated.  The  billion-dollar  steel  cor- 
poration was  organized.  Ten  million-dollar  banks  were 
created  and  later,  twenty-five  million-dollar  banks. 
American  capital  began  to  show  signs  of  eagerness  for 
other  worlds  to  conquer,  and  stretched  its  hands  across 
the  sea. 

Big  Business  and  the  Government. — The  term  "Cap- 
tains of  Industry"  was  applied  to  the  great  leaders  in 
this  national  advance.  But  unprecedented  prosperity 
brought  with  it  new  perils  and  new  problems.  In  1903, 
another  era  opened  in  Wall  Street  history,  a  new  national 
issue — that  of  the  big  corporations,  railroad  and  indus- 
trial, in  their  relations  to  the  government  and  the  people 
— arose,  with  results  as  far  reaching  as  the  preceding  na- 
tional issues  of  slavery,  reconstruction  and  silver  bimetal- 
lism. The  beginning  of  the  government  suit  to  break  up 
the  railroad  combination  known  as  "the  Northern  Secur- 
ities Company"  may  be  said  to  have  been  the  formal, 
visible  opening  of  this  era.  The  question  of  the  measure 
and  manner  of  the  enforcement  of  the  Sherman  anti- 
trust law,  the  question  of  the  degree  of  governmental 
regulation  of  railroad  i%.tes  and  railroad  finances,  the 
rapid  extension  of  political  control  of  business  enter- 
prise, commanded  the  attention  of  the  country,  and  soon 
began  to  disturb  the  markets  and  interfere  with  the  free 


EVOLUTION  OF  WALL  STREET  29 

play  of  capital.  Wall  Street,  as  the  center  of  the  money- 
market,  and  as  the  financial  headquarters  of  the  larger 
corporations,  inevitably  came  under  attack;  and  the 
stock-market  naturally  reflected  the  varying  course  of 
the  struggle  that  ensued.  The  struggle  involved  not 
only  necessary  reforms  in  the  administration  of  corporate 
business,  but  what  was  far  more  fundamental  to  the  fu- 
ture development  of  the  country,  the  degree  of  per- 
missable  co-operation  in  regulating  and  limiting  competi- 
tion, so  as  to  reduce  its  wastes  and  provide  for  that  cen- 
tralization of  administration  deemed  necessary  for  the 
peaceful  development  of  home  markets  and  the  conquest 
of  foreign  markets.  The  effect  of  these  domestic  condi- 
tions was  accentuated  by  a  world-wide  political  and  so- 
cial unrest.  An  immense  gold  production,  a  universal 
uplift  of  prices  advancing  the  cost  of  living,  the  develop- 
ment of  an  aggressive  trade  unionism  and  a  growth  of 
socialism  in  different  forms,  were  incidents  of  the  period 
from  1903  to  1912,  and  they  augmented  the  uncertainties 
and  disorders.  They  impaired  confidence  and  re- 
tarded business  enterprise. 

Panic  of  1907. — Out  of  these  developments  sprang  the 
panic  of  1907,  with  all  the  familiar  phenomena  of  bank 
suspensions,  mercantile  failures,  industrial  depression, 
and  decline  of  the  security  markets.  It  was  the  leader- 
ship of  J.  Pierpont  Morgan,  aided  by  another  Clearing- 
House  loan  committee,  which  prevented  a  complete 
financial  collapse. 

From  the  effects  of  this  panic  there  was  a  rapid  recov- 
ery in  1909-10,  followed  by  another  period  of  reaction. 
The  panic  revealed  again  the  need  of  a  great  central 
banking  reserve  under  co-operative  control,  and  this  led 
to  the  creation  of  a  Monetary  Commission  to  study  the 
banking  and  currency  problem.  The  panic  also  revealed 
some  weakness  in  the  machinery  of  the  stock-market, 


30  WORK  OF  WALL  STREET 

and  a  commission  was  appointed  by  Governor  Hughes 
to  study  the  Wall  Street  system  of  speculation  in  secur- 
ities and  commodities.  The  result  of  this  investigation 
was  two-fold:  it  led  to  the  removal  of  certain  abuses,  and 
the  improvement  of  certain  methods;  and  at  the  same 
time  it  demonstrated  the  substantial  integrity  and  the 
economic  value  of  the  stock-market. 

United  States  Supreme  Court  decisions  in  cases  involv- 
ing the  enforcement  of  the  Sherman  anti-trust  law  com- 
pelled the  dissolution  of  the  Standard  Oil  and  American 
Tobacco  Companies,  and  brought  about  a  change  in  the 
conditions  under  which  "big  business"  could  be  legally 
conducted.  Notwithstanding  the  political  agitation  of 
problems  affecting  the  conduct  of  this  "big  business," 
important  developments  took  place  in  the  railroad,  the 
industrial,  the  banking  and  the  investment  field  during 
this  period.  There  was  further  expansion  in  the  size  of 
banks  and  trust  companies,  and  the  admission  into  the 
New  York  Clearing-House  of  the  most  of  the  leading  trust 
companies  doing  a  banking  business  was  a  notable 
strengthening  of  the  financial  structure.  The  brilliant 
plans  of  the  ambitious  Edward  H.  Harriman,  although 
not  fully  realized  at  the  time  of  his  death,  produced  some 
of  the  most  remarkable  and  dramatic  incidents  of  the 
decade,  and  contributed  largely  to  the  increased  efficiency 
and  strength  of  the.  American  railways. 

In  this  bird's-eye  view  of  the  evolution  of  Wall  Street 
little  notice  has  been  taken  of  persons.  It  would  be 
pleasant,  if  space  permitted,  to  retrace  the  footsteps  of 
Alexander  Hamilton  in  the  Street,  and  note  the  stir  made 
by  the  frequent  visits  of  Nicholas  Biddle.  How  delight- 
ful must  have  been  those  evenings  spent  by  the  bankers 
and  brokers  of  ninety  years  ago  in  Baker's  Hotel,  in  Wall 
near  New  Street,  at  the  meetings  of  the  social  organiza- 
tion called  "The  House  of  Lords,"  of  which  Bernard 


EVOLUTION  OF  WALL  STREET  31 

Hart  'was  President!     Many  an  important  deal  was  dis- 
cussed and  arranged  there. 

Across  the  broad  stage  of  Wall  Street  has  passed  a 
long  procession  of  notable  men ;  men  of  achievement  as 
well  as  men  of  destruction;  men  who  have  added  to  the 
wealth  and  happiness  of  the  country,  and  men  whose 
only  claim  to  fame  was  the  audacity  of  their  operations. 
In  1820  NathanieJ  Prime  and  John  Ward  appear  to  have 
been  the  most  active  Wall  Street  speculators.  Jacob 
Barker,  the  early  Rothschild  of  the  market ;  Jacob  Little, 
the  first  of  the  long  line  of  "Napoleons  of  Wall  Street," 
who  made  and  lost  nine  fortunes,  and  was  the  first  to 
invent  the  convertible  bond  trick ;  Simeon  Draper,  whose 
death  in  1853  caused  a  flurry;  Daniel  Drew,  the  great 
speculative  director;  Commodore  Vanderbilt,  creator  of 
the  New  York  Central  Railroad  System ;  his  son,  William 
H.  Vanderbilt,  whose  sudden  death,  while  conferring  with 
Robert  Garrett,  caused  much  excitement  in  financial  cir- 
cles; Jay  Gould,  both  builder  and  wrecker  of  values, 
at  once  bold  and  conservative,  and  at  all  times  subtle, 
adroit,  and  able;  James  Fisk,  whose  sensational  career 
had  a  sensational  ending  in  his  murder  by  Stokes ;  Russell 
Sage,  for  years  the  Street's  largest  individual  money- 
lender, and  a  factor  in  corporations  and  speculations  for 
half  a  century;  David  Dow,  Cyrus  W.  Field,  Horace  F. 
Clark,  William  S.  Woodward,  Alexander  Mitchell,  Wil- 
liam H.  Marsten,  Anthony  W.  Morse,  Leonard  Jerome, 
and  William  R.  Travers,  the  wit  of  the  Street;  Henry 
Clews,  the  veteran,  who  has  embodied  his  experiences  of 
fifty  years  in  two  volumes  of  reminiscences;  Jay  Cooke, 
the  first  promoter  of  the  Northern  Pacific,  who  lived  to 
see  his  dreams  of  its  future  greatness  realized;  Henry 
Villard,  who  completed  the  road  by  driving  "the  golden 
spike,"  and  who  organized  the  first  big  "Blind  Pool"; 
George  I.  Seney,  who  promoted  the  "Nickel  Plate,"  and 


32  WORK  OF  WALL  STREET 

astonished  the  Street  with  the  way  in  which  he  w'atered 
its  stock  and  succeeded  in  unloading  the  property  on  the 
Vanderbilts;  Addison  Cammack  and  Charles  F.  Woeri- 
shoffer,  long  the  most  noted  bears  of  the  stock-market; 
Henry  N.  Smith,  once  partner,  but  later  the  rival  and 
enemy  of  Gould;  William  Heath,  who  went  down  in 
Smith's  failure;  S.  V.  White,  astronomer  and  lawyer  as 
well  as  broker,  and  once  the  noted  manipulator  of  Lacka- 
wanna;  James  R.  Keene,  who  long  held  a  unique  place 
in  the  stock-market  as  the  skillful  manager  of  colossal 
operations  for  himself  and  for  syndicates;  Francis  L. 
Eames,  President  and  historian  of  the  Exchange,  and 
founder  of  its  Clearing-House ;  J.  Edward  Simmons,  the 
only  man  who  served  as  President  of  the  Stock  Exchange, 
the  Bank  Clearing-House  and  the  Chamber  of  Commerce ; 
W.  R.  Vermilye,  Donald  Mackay,  and  Washington  E.  Con- 
ner ;  F.  D.  Tappen,  the  banker  who  took  the  helm  in  timer 
of  panic  and  piloted  the  ship  of  finance  through  the  storm 
to  a  port  of  safety;  R.  P.  Flower,  the  first  leader  in  the 
McKinley  boom ;  August  Belmont,  George  J.  Gould,  W.  K. 
Vanderbilt,  George  F.  Baker,  James  Stillman,  Henry  W. 
Cannon,  John  D.  Rockefeller,  William  Rockefeller,  H.  H. 
Rogers,  E.  H.  Harriman,  the  so-called  "Colossus  of 
Roads";  Jacob  H.  Schiff,  the  noted  Hebrew  banker,  and 
last,  and  perhaps  the  greatest,  J.  Pierpont  Morgan,  the 
only  man  who  has  ever  carried  to  successful  consumma- 
tion a  billion-dollar  enterprise — these  are  some  of  the 
names  that  have  made  Wall  Street  famous. 

During  the  past  thirty  years  the  architecture  of  the 
financial  district  has  undergone  a  metamorphosis.  Old 
structures  have  been  torn  down  and  new  and  towering 
buildings  have  taken  their  place,  so  that  there  is  now  lit- 
tle left  as  a  reminder  of  the  past  except  Trinity  Church 
and  the  Subtreasury. 

Accompanying  this  transformation  in  the  outward  form 


EVOLUTION  OF  WALL  STREET  33 

of  Wall  Street  there  has  been  a  like  change  in  its  inner 
life  and  spirit.  A  notable  expansion  and  improvement 
in  its  facilities  has  taken  place.  The  methods  of  the 
stock-market  have  been  modernized.  Greater  safeguards 
against  reckless  and  dishonest  speculation  have  been 
adopted.  New  barriers  have  been  raised  against  the 
ravages  of  panic.  Speculation  is  at  once  bolder  and  bet- 
ter protected.  The  banks  have  increased  their  capital, 
augmented  their  resources,  and  by  co-operation  are  able 
to  present  a  solid  front  against  the  approach  of  disaster. 
What  the  future  has  in  store  no  one  can  tell.  Human 
nature  changes  slowly  from  century  to  century.  There 
has  been  much  even  in  recent  conditions  to  remind  one  of 
the  South  Sea  and  Mississippi  bubbles  of  two  hundred 
years  ago.  The  stock-market  will  no  doubt  continue  to 
present  the  same  strange  contrasts  of  panics  and  booms, 
of  intelligent  investment  and  reckless  speculation,  of  con- 
struction and  of  wrecking,  of  splendid  achievement  and 
of  scandalous  dishonesty.  But  unless  the  experience  of 
the  nineteenth  century  has  gone  for  naught,  Wall  Street 
in  the  twentieth  century  will  show  forth  far  more  of 
glory  than  of  shame. 

Stages  of  Market  Evolution. — From  this  rapid  review 
of  the  history  of  Wall  Street,  it  is  possible  to  trace  the 
various  stages  in  the  evolution  of  its  financial  machinery. 

First,  men  experienced  the  need,  and  discovered  in  the 
corporation  the  method,  of  co-operation  in  business.  Next 
came  the  stock  certificate,  issued  as  evidence  of  partner- 
ship in  the  corporate  enterprise.  This  afforded  a  new 
field  for  the  investment  of  savings.  As  the  demand  for 
stocks  increased,  and  new  companies  were  formed,  the 
certificates  more  and  more  became  subject  to  purchase 
and  sale.  A  market  for  securities  thus  developed.  This 
was  first  on  the  street,  but  later  it  became  necessary  to 
organize  it  with  by-laws  and  rules,  and  out  of  this  the 


34  WORK  OF  WALL  STREET 

Stock  Exchange  grew.  There  were  so  many  buyers  and 
sellers  of  stocks  for  investment,  that  fluctuations  in  prices 
became  frequent,  which  led  a  number  of  persons  to  specu- 
late in  future  values.  This  speculation  expanded  so 
greatly  that,  while  it  performed  a  valuable  service  in  aid- 
ing in  the  distribution  of  securities  and  in  making  capital 
more  mobile,  it  developed  abuses,  and  at  times  so  over- 
loaded the  credit  structure  as  to  cause  a  collapse.  With 
the  rapid  conversion  of  all  forms  of  business  into  stock 
companies,  and  the  equally  rapid  growth  of  the  stock- 
market,  it  was  inevitable  that  the  Stock  Exchange  should 
exist  near  the  great  banks  and  the  Clearing-House,  and 
that  a  big  international  market  for  credits  and  securities 
should  develop  in  the  leading  commercial  city  of  the  coun- 
try. It  was  inevitable  also  that  there  should  be  evolved 
in  this  market  a  code  of  rules  and  of  ethics  to  insure  as 
high  a  degree  as  possible  of  fair  play,  publicity,  and  se- 
curity; and  these  rules  have  advanced,  and  will  continue 
to  advance,  in  their  requirements,  as  business  becomes 
more  and  more  a  standardized  profession.  The  history 
of  the  New  York  stock-market,  like  the  stock-markets  of 
London  and  Paris,  is  closely  identified  with  the  history 
of  commerce  and  of  public  finance. 

REFERENCES 

Some  of  the  Sources  of  Information  Consulted  in  Addition  to 

Old  Records,  Newspapers  and  Documents. 

"History  of  Coinage  and  Currency  in  the  United  States,"  A  Bar- 
ton Hepburn,  1903. 

"Men  and  Mysteries  of  Wall  Street,"  J.  K.  Medbury,  1876. 
"Fifty  Years  in  Wall  Street,"  Henry  Clews,  1908. 
"Wall  Street  Point  of  View,"  Henry  Clews,  1900. 
"Story  of  the  Stock  Exchange"  (London),  1902. 
"Ten  Years  in  Wall  Street,"  W.  W.  Fowler,  1870. 
"Forty  Years  of  American  Finance,"  A.  D.  Noyes. 
"History  of  the  New  York  Stock  Exchange,"  E.  C.  Stedman,  1904. 
"Early  History  of  Wall  Street,"  O.  G.  Villard,  1897. 


EVOLUTION  OF  WALL  STREET  35 

"Financial  History  of  the  United  States,"  Davis  R.  Dewey,  1903. 

"Thirty  Years  View,"  Thomas  H.  Benton,  1864. 

"Financial  History  of  the  United  States,"  A.  S.  Bolles,  1884. 

"History  of  Banking,"  Edited  by  editor  of  the  Journal  of  Com- 
merce and  Commercial  Bulletin. 

"Chapters  of  Erie  and  other  Essays,"  Charles  F.  and  Henry 
Adams,  1886. 

"The  Old  Merchants  of  New  York,"  Walter  Barrett,  1885. 

"The  American   Commonwealth,"   James   Bryce,   1891. 

"A  History  of  the  Bank  of  New  York,"  1884. 

Diary  of  Philip  Hone,  1828-51. 

"History  of  the  City  of  New  York,"  Mrs;  Martha  J.  Lamb,  1877. 

"The  History  of  England,"  Thomas  A.  Macaulay,  1861. 

"The  Outside  Fools,"  Erasmus  Pinto,  1877. 

"A  History  of  Banking  in  the  United  States,"  William  G.  Sum- 
ner,  1896. 

"American  Almanac,"  1834-61. 

Bankers'  Magazine,  1846-1911. 

"A  Week  in  Wall  Street,"  By  one  Who  Knows,  1841. 


CHAPTER  H 
GENERAL  VIEW  OF  WALL  STREET 

Wall  Street  is  one  of  the  shortest  and  one  of  the  longest 
streets  in  the  world.  Geographically  it  extends  from 
Broadway  to  the  East  River,  only  that  part  west  of  Pearl 
Street  being  occupied  by  banks,  bankers  and  brokers. 
Financially,  however,  it  reaches  from  London  to  Manila. 
It  is  a  national  and  international  thoroughfare. 

As  most  commonly  used,  the  name  applies  to  a  certain 
section  of  the  city  where  the  banks  and  the  exchanges 
and  the  offices  of  the  corporations  which  depend  upon 
them  are  located.  The  offices  of  the  Trustees  of  Columbia 
University  and  of  the  excellent  Seamen's  Friend  Society 
are  in  Wall  Street,  but  are  far  less  of  it  than  are  many 
institutions  that  are  located  far  away — as,  for  instance, 
the  Chemical  Bank,  facing  the  City  Hall,  the  general  of- 
fices of  the  New  York  Central  Railroad,  at  Forty-second 
Street,  and  the  corridors  of  the  Waldorf-Astoria  Hotel, 
where  the  brokers  and  operators  are  wont  to  congregate 
in  the  evening,  as  in  former  years  they  assembled  at  the 
Fifth  Avenue  Hotel,  and  later  at  the  Windsor. 

"In  Wall  Street."— A  man  is  said  to  be  "in  Wall 
Street"  who  is  engaged  in  business  directly  connected 
with  the  great  exchanges  and  banks,  and  the  banking 
houses  and  corporations  in  close  affiliation  with  them. 
The  telegraph  has  vastly  extended  the  boundaries  of  the 
financial  district.  The  banks  have  close  affiliations  with 
other  banks  and  with  individuals  and  corporations  in 
all  parts  of  the  country.  The  brokers  maintain  branch 
offices,  often  with  direct  wire  connections,  in  many  cities 
and  towns.  A  man  living  in  Denver  or  Seattle  may  be 

36 


ChanJ^rofl     [        . 
Co.nm.reJ     j 

LIBERTY      ST. 


MAP  OF  WALL  STREET  DISTRICT 


T7 

c/i 


38  WORK  OF  WALL  STREET 

more  truly  "in  Wall  Street"  than  a  resident  of  Brooklyn 
or  Harlem. 

Draw  a  line  east  and  west  from  river  to  river  across 
Manhattan  Island,  along  the  line  of  Fulton  Street,  and 
the  territory  south  of  it  comprises  the  financial  center. 
The  city  is  only  three-quarters  of  a  mile  wide  at  Fulton 
Street,  which  is  only  half  a  mile  from  the  Battery;  yet 
within  this  narrow  district  is  concentrated  more  wealth, 
probably,  than  in  any  other  like  area  in  the  world.  The 
Stock  Exchange  stands  about  in  the  center,  on  Broad  and 
New  Streets,  with  a  narrow  wing  facing  on  Wall  Street. 
The  Bank  Clearing-House  occupies  a  stately  building  on 
Cedar  Street,  between  Broadway  and  Nassau  Street. 
The  Subtreasury  stands  on  Wall  at  the  corner  of  Nassau, 
facing  Broad  Street,  and  the  Assay  Office  occupies  the 
building  adjoining  on  Wall.  The  Custom  House,  through 
which  one-half  of  the  commerce  of  the  United  States 
passes,  long  had  its  home  in  the  old  Merchants'  Exchange 
building  on  Wall  Street,  corner  of  William,  but  now  oc- 
cupies a  magnificent  structure  fronting  Broadway  at 
Bowling  Green.  Near  the  site  of  the  new  Custom  House, 
at  the  corner  of  Beaver  Street,  stands  the  immense  Prod- 
uce Exchange  building,  occupying  the  ground  where  for- 
merly was  the  first  market  of  the  old  Dutch  city.  The 
Produce  Exchange  is  devoted  to  transactions  in  grains 
and  provisions.  The  Maritime  Exchange,  which,  as  its 
name  implies,  is  the  meeting  place  of  ship  brokers  and 
others  engaged  in  the  shipping  trade  and  in  which  rep- 
resentatives of  76  steamship  lines  entering  New  York  are 
members,  formerly  had  offices  in  the  Produce  Exchange, 
but  now  has  a  home  of  its  own  in  Broad  Street.  During 
the  rebuilding  of  the  Stock  Exchange,  the  Stock  Board 
for  more  than  a  year  occupied  a  part  of  the  big  Exchange 
room  of  the  Produce  Exchange.  The  Cotton  Exchange, 
founded  in  1870,  and  the  largest  institution  of  the  kind 


GENERAL  VIEW  OF  WALL  STREET  39 

in  this  country,  has  a  fine  building  at  Hanover  Square, 
on  the  site  where  Bradford  printed  the  first  newspaper 
published  in  New  York.  Close  to  the  Cotton  Exchange 
stands  the  Coffee  Exchange.  Within  the  financial  dis- 
trict, the  metal  trade  and  the  real  estate  interests  have 
organizations  representing  them.  In  the  settlement  of 
estates  many  investment  securities  are  sold  at  auction  in 
the  Real  Estate  salesrooms.  On  the  corner  of  Beaver  and 
Broad  Streets  stands  the  Consolidated  Stock  Exchange, 
where  formerly  there  was  a  heavy  speculation  in  oil,  but 
which  now  does  a  large  business  in  stocks,  mostly  in  lots 
smaller  than  those  traded  in  at  the  Stock  Exchange. 

The  sugar  trade  monopolizes  a  large  part  of  the  lower 
end  of  Wall  Street.  In  Pearl  Street  is  concentrated  a 
section  of  the  tobacco  trade.  The  metal  trade  gathers 
around  the  Metal  Exchange,  the  cotton  trade  in  and 
around  the  Cotton  Exchange,  and  the  grain  trade  in  and 
around  the  Produce  Exchange.  The  steamship  and  ex- 
press companies  are  found  on  Broadway,  below  Wall 
Street.  The  fire  and  marine  insurance  companies  center 
in  Wall,  Pine  and  Cedar  Streets.  Several  of  the  life  in- 
surance companies,  including  the  two  largest,  whose  com- 
bined assets  amount  to  nearly  $1,000,000,000,  are  also  in 
this  district.  The  Standard  Oil  Company  has  its  head- 
quarters in  a  building  of  its  own  in  lower  Broadway, 
and  the  Western  Union  Telegraph  Company  in  a  build- 
ing at  the  corner  of  Dey  Street. 

In  this  financial  district  there  are  29  National  and  State 
banks,  of  which  9  are  on  Wall  Street ;  30  trust  companies, 
of  which  6  are  on  Wall  Street;  the  general  or  principal 
fiscal  offices  of  150  railroad  corporations;  8  life,  38  fire 
and  marine,  and  38  other  insurance  companies;  9  safe 
deposit  companies ;  6  express,  21  telegraph,  and  18  steam- 
ship companies;  42  coal,  iron,  steel,  and  copper  com- 
panies; and  of  more  than  200  large  industrial,  manufac- 
.  5 


40  WORK  OF  WALL  STREET 

turing,  and  other  miscellaneous  corporations.  Every 
company  whose  securities  are  listed  in  the  Stock  Ex- 
change has  a  transfer  office  within  convenient  distance 
of  it.  The  brokers  make  their  headquarters  in  the  tower- 
ing office  buildings,  those  wonderful  structures  of  steel, 
clothed  in  stone  and  marble,  which  have  made  the  streets 
in  the  financial  district  a  series  of  deep  canons.  One  of 
these  buildings  is  said  to  contain  more  rooms  than  any 
other  in  the  world  and  to  house  during  the  day  over  11,000 
persons.  The  private  bankers,  of  course,  have  their  elab- 
orate establishments  within  this  district.  The  house  of 
J.  P.  Morgan  &  Company  occupies  the  Drexel  Building, 
at  the  corner  of  Wall  and  Broad  Streets,  which  has  the 
reputation  of  standing  on  the  most  valuable  site  per 
square  foot  of  any  real  estate  in  New  York.  The  curb 
market  has  been  situated  on  Broad,  just  below  Exchange 
Place,  but  has  been  obliged  from  time  to  time  to  shift  its 
position. 

The  Chamber  of  Commerce. — The  Chamber  of  Com- 
merce of  the  State  of  New  York,  the  oldest  and  most  im- 
portant institution  of  the  kind  in  the  world,  occupies  a 
stately  building  in  Liberty  Street,  and  its  assembly  hall, 
filled  with  portraits  of  leading  merchants  and  bankers  of 
former  years,  is  one  of  the  most  beautiful  in  the  country. 
No  trading  is  carried  on  in  the  Chamber,  and  it  is  not  a 
part  of  the  credit,  much  less  of  the  speculative,  machinery 
of  Wall  Street.  It  is  "the  merchants'  forum."  Its 
special  function  is  to  promote  and  protect  the  interests 
of  the  commerce  of  the  city  and  State;  and  its  mem- 
bership, while  including  bankers  and  brokers,  is  composed 
largely  of  merchants  and  manufacturers  and  officers  of 
industrial  and  railroad  corporations.  But  so  closely  is 
commerce  bound  up  with  the  money  and  security  markets 
by  ties  of  mutual  interest,  the  big  merchants  being  di- 
rectors in  banks  and  corporations  and  the  bankers  hav- 


GENERAL  VIEW  OF  WALL  STREET  41 

ing,  in  many  cases,  an  influential  voice  in  the  direction 
of  the  leading  industrial  and  mercantile  companies,  that 
it  is  not  easy  to  draw  the  line  separating  commerce  from 
finance.  This  is  not  a  thing  to  be  deplored.  It  is  the  in- 
evitable result  of  that  community  of  interests  which  now 
unites  the  whole  world  of  business.  The  Chamber  of 
Commerce,*  with  its  committees  on  Finance  and  Currency, 
Foreign  Commerce  and  the  Revenue  Laws,  Harbor  and 
Shipping,  Internal  Trade  and  Improvements,  Insurance, 
State  and  Municipal  Taxation,  Commercial  Education, 
and  Arbitration,  has,  since  its  organization  in  1768,  con- 
stantly labored  for  sound  currency  and  banking  laws,  an 
equitable  administration  of  the  tariff,  the  extension  of 
our  foreign  trade,  the  improvement  of  the  harbor  and 
terminal  facilities,  the  maintenance  of  good  insurance 
methods,  the  enacting  of  just  tax  laws,  the  encouragement 
of  commercial  education,  the  arbitration  of  mercantile 
disputes,  the  establishment  of  good  municipal  govern- 
ment, the  promotion  of  world  peace,  the  extension  of 
philanthropy  to  different  parts  of  the  world  suffering 
from  great  calamities,  and  the  cultivation  of  that  inter- 
national hospitality  which  brings  different  nations  and 
races  closer  together. 

Those  who  look  upon  the  financial  district  with  sus- 
picion and  imagine  that  only  selfishness  and  sordidness 
prevail  there  should  examine  these  remarkable  institu-  / 
tions,  the  Chamber  of  Commerce  and  the  Clearing-House./ 
They  will  discover  high  ethical  standards,  a  lofty  altru-/ 
ism,  and  an  enlightened  and  earnest  public  spirit.    Many\ 

*  In  February,  1912,  A.  Barton  Hepburn,  President  of  the  Cham-    \ 
ber  of  Commerce  and  of  the  Clearing-House  Association,  said: 

"The  two  most  powerful  influences  in  commercial  and  business 
affairs  in  this  country  are  undoubtedly  the  New  York  Chamber  of 
Commerce  and  the  New  York  Clearing-House.  We  are  located  in 
close  proximity,  we  serve  practically  the  same  community,  and  the 
same  interests,  and  we  are  largely  composed  of  the  same  member- 
ship in  different  form." 


42  WORK  OF  WALL  STREET 

of  the  busiest  men  in  the  world  give  freely  of  their  time 
(which  is  even  more  valuable  than  their  money)  in  the 
performance  of  public  duty  on  committees. 

Wall  Street  is  not  only  a  clearing-house  for  (jredit  and 
securities.  It  is  also  a  clearing-house  for  art,  for  educa- 
tion, for  philanthropy,  and  for  religion,  in  all  of  which 
many  of  it  leading  men  are  deeply  concerned,  and  its  work 
in  the  promotion  of  these  interests  is  scarcely  less  impor- 
tant to  the  country,  than  its  work  in  its  own  special  field 
of  enterprise.  The  enemies  of  Wall  Street  insist  upon 
judging  it  by  its  worst  side.  In  all  fairness  it  should 
be  measured  by  the  immense  services  it  performs. 

A  Study  in  Billions. — More  than  a  century  ago  the 
volume  of  Wall  Street's  business  was  easily  computed  in 
thousands.  Later  its  transactions  were  in  millions.  To- 
day any  sketch  of  the  work  of  Wall  Street  must  necessa 
rily  be  a  study  in  billions.  Even  the  sum  of  $50,000  paid 
out  of  the  Treasury  in  1792  by  Hamilton  was  sufficient 
to  afford  some  relief  to  the  Street  in  a  time  of  financial 
distress.  It  would  be  but  a  drop  in  the  bucket  to-day. 
In  March,  1902,  J.  Pierpont  Morgan,  testifying  in  the 
Northern  Securities  case,  spoke  of  a  $10,000,000  deal  as 
if  it  were  a  small  matter. 

Object  alike  of  fascination  and  fear,  Wall  Street  is  the 
best  known  and  least  understood  street  in  America;  ob- 
ject of  fascination,  because  of  the  glamor  of  the  great 
fortunes  made  and  lost  there ;  object  of  fear,  because,  of 
its  wealth  and  power.  It  is  as  mysterious  to  the  outsider 
as  a  Masonic  Lodge  is  to  one  who  has  never  passed 
through  its  ceremonies  of  initiation.  Like  Masonry, 
Wall  Street  has  its  code  of  morals,  its  ritual  or  forms  of 
doing  business,  its  working  tools,  and  a  strange  language 
which  only  the  initiated  can  understand.  Moreover,  no 
Masonic  Lodge  is  ever  tiled  more  closely  than  is  Wall 
Street,  where,  notwithstanding  its  immense  deposits  of 


GENERAL  VIEW  OF  WALL  STREET  43 

money  and  valuable  securities,  robbery  is  seldom  at- 
tempted and  still  more  rarely  accomplished,  so  carefully 
is  it  policed. 

It  will  be  found  that  the  nearer  we  get  to  the  mysteries 
of  Wall  Street  the  less  mysterious  they  appear.  In  truth, 
strange  as  may  seem  some  of  its  terms  and  methods,  noth- 
ing could  be  more  direct  or  simple  than  the  principles 
upon  which  it  conducts  its  business. 

Wall  Street  is  to  the  United  States  what  Capel  Court 
and  Threadneedle,  Throgmorton,  and  Lombard  Streets  are 
to  England,  the  seats  of  the  stock-  and  money-markets. 
So  rich  is  this  country,  so  extensive  its  territory  and  so 
immense  and  varied  its  resources,  that  Wall  Street's 
power  is  now  recognized  the  world  over  as  second  only 
to  that  of  London.  American  manufacturers  are  com- 
peting for  trade  in  every  market.  American  capital  is 
employing  itself  in  Canada  and  South  America,  has  in- 
vaded London  and  Rotterdam,  and  is  gradually  spread- 
ing itself  over  Europe  and  Asia.  The  time  can  not  be  far 
distant,  therefore,  when  the  securities  of  the  world  will 
be  represented  in  the  markets  of  Wall  Street  as  they  are 
now  in  London.  ' '  The  debtor  nation, ' '  said  Secretary  of 
State  Hay  in  his  McKinley  memorial  address,  "has  be- 
come the  chief  creditor  nation.  The  financial  center  of 
the  world,  which  required  thousands  of  years  to  journey 
from  the  Euphrates  to  the  Thames  and  the  Seine,  seems 
passing  to  the  Hudson  between  daybreak  and  dark." 
In  view  of  the  fact  that  the  population  of  the  Metropoli- 
tan district  of  New  York  now  closely  approaches,  and  in 
ten  years  promises  to  exceed,  that  of  the  Metropolitan 
district  of  London,  this  prediction  does  not  seem  so  dis- 
tant of  fulfillment  as  it  did  when  spoken. 

Vastness  and  Conservatism. — Yet  in  spite  of  its  great- 
ness, there  is  a  sense  in  which  Wall  Street  is  provincial. 
It  has  been  said  that  ' '  vastness  is  often  the  parent  of  nar- 


44  WORK  OF  WALL  STREET 

rowness. ' '  The  narrowness  of  Wall  Street  has  a  basis  of 
reality,  but  it  is  more  apparent  than  real.  The  vast  ex- 
tent of  its  interests  leads  some  Wall  Street  men  to  view 
with  indifference,  and  sometimes  with  contempt,  the  in- 
terests that  lie  outside  of  it.  To  that  extent  its  narrow- 
ness is  real.  But  Wall  Street  seems  to  multitudes  of  peo- 
ple to  be  narrow  simply  because  it  is  not  in  sympathy 
with  radical  ideas.  Vast  interests  bring  heavy  responsi- 
bilities. Wall  Street  is  a  conservative  force  in  the  coun- 
try ;  and  while  it  is  not  opposed  to  an  orderly  advance,  it 
serves  as  a  check  upon  rapid  progress  in  dangerous  eco- 
nomic and  political  experiments.* 

*  "Speaking  from  my  own  experience  in  Wall  Street,  I  have  no 
hesitation  in  saying,  first,  that  men  as  a  rule  speak  the  truth  in 
Wall  Street  in  speaking  of  that  which  they  know,  and  second,  that 
there  is  wider  dissemination  of  essential  truth  in  Wall  Street  and 
a  better  general  understanding  of  that  truth,  so  far  as  facts  and 
figures  bearing  upon  securities  are  concerned  than  there  is  in  other 
commercial  and  industrial  communities  with  respect  to  their  char- 
acteristic products  that  are  bought  and  sold." 

THOMAS  F.  WOODLOCK. 


CHAPTER  III 
FUNCTION  OF  WALL  STREET 

New  York  is  the  gateway  of  the  Nation's  Commerce, 
and  Wall  Street  has  been  likened  to  a  toll-gate  to  pass 
which  every  product  of  the  country  must  pay  tribute. 
As  no  one  likes  to  pay  toll,  this  would  account  for  much 
of  the  animosity  so  often  manifested  against  the  financial 
center.  Yet  someone  must  make,  maintain  and  operate 
the  various  agencies  by  which  the  products  of  the  coun- 
try reach  the  markets,  and  it  is  right  that  the  service 
should  be  paid  for. 

Transportation. — Wall  Street  is  the  directing  head  of 
the  great  system  of  transportation,  using  that  term  in  its 
broadest  significance,  as  including  not  only  the  railroads 
and  steamships,  but  also  the  banks  and  exchanges,  and 
all  the  other  manifold  agencies  by  which  the  products  of 
the  soil  are  brought  to  the  homes  of  consumers  in  forms 
fit  for  human  use.  Without  the  products  the  race  would 
starve.  Without  the  facilities  by  which  the  products  are 
moved  and  fashioned  and  financed,  the  products  would 
not  reach  those  for  whom  they  are  intended,  and  civiliza- 
tion would  perish.  It  has  been  said  that  the  world  is 
never  much  more  than  a  day  distant  from  starvation; 
and  the  operation  by  which  production  is  brought  to  the 
door  of  consumption  by  human  agencies  is  so  marvelous 
in  its  speed,  accuracy  and  power,  as  to  seem  almost  as 
much  a  miracle  as  the  operations  of  nature  fixed  by  di- 
vine edict.  Wall  Street,  in  its  financial  machinery,  fa- 
cilitates the  natural  flow  of  money,  provides  the  means 
for  the  promotion  of  enterprises,  safeguards  and  assists 
the  movement  of  commerce,  and  maintains  that  system 

45 


46  WORK  OF  WALL  STREET 

of  credits  by  which  a  ten-fold  power  of  service  is  given 
to  every  dollar. 

Diffusion  of  Wealth. — By  the  machinery  of  its  stock- 
market  it  promotes  the  diffusion  of  wealth ;  it  makes  pos- 
sible for  great  capital  to  be  accumulated  for  vast  under- 
takings, governmental  and  private,  too  big  for  individual 
effort;  it  enables  a  multitude  of  small  capitalists  to  be- 
come partners  in  these  big  enterprises,  by  its  agencies  for 
the  distribution  of  securities  from  the  hands  of  producers 
into  the  hands  of  investors  as  the  ultimate  consumers;* 
and  it  is  able  by  its  speculative  machinery  to  anticipate 
human  needs,  and  to  secure  a  more  even  and  equitable 
level  of  prices.  For  this  work  it  must  be  paid,  call  it  a 
fee  if  it  be  regarded  as  professional  service,  call  it  a  toll 
if  it  is  thought  to  liken  Wall  Street  to  a  gate,  or  a  tax 
if  one  prefers  to  speak  of  Wall  Street  as  exercising  legis- 
lative power,  or  a  price  if  it  is  thought  more  proper  to 
regard  Wall  Street  as  a  merchant  selling  credit  and  se- 
curities for  the  most  they  will  bring.  But  whether  a  fee, 
a  toll,  a  tax,  or  a  price,  it  can  not  be  disputed  that  Wall 
Street  earns  a  reward  for  an  indispensable  service. 

There  is  a  feeling  that  Wall  Street  has  charged  too 
much  for  its  labor  and  that  this  excess  charge  constitutes 
an  intolerable  burden  upon  the  business  of  the  country,  t 

If  this  were  true,  in  any  large  way,  Wall  Street  could 
not  exist.  Wall  Street  has  no  monopoly  of  facilities.  If 

*  The  fundamental  function  of  the  Exchanges  is  to  give  mobility 
to  capital."  CHARLES  A.  CONANT. 

fThe  Commissioner  of  Corporations,  in  his  report  (1911)  on  The 
United  States  Steel  Corporation,  charged  that  excessive  profits  were 
made  by  the  underwriters  who  organized  the  company,  in  as  much 
as,  on  a  cash  expenditure  of  $28,000,000,  it  made  a  net  profit  of 
$62,500,000,  of  which  one-half  went  to  the  managers  and  the  rest  to 
the  syndicate  members.  The  liability  of  the  underwriters  is  de- 
clared to  have  been  "nominally"  $200,000,000,  but  not  really  more 
than  the  sum  actually  advanced.  On  the  other  hand  the  report  at- 
tempts no  real  appraisement  of  the  value  of  the  expert  service  and 
influence  given. 


FUNCTION  OF  WALL  STREET  47 

it  charges  too  much  for  its  services,  it  has  competitors 
to  whom  one  may  go.  If  it  is  inefficient  or  false  to  its 
trust,  it  must  surely  fall.  'Individual  instances  of  graft, 
and  other  forms  of  corruption  and  of  manipulation  and 
extortion,  it  would  be  easy  to  prove,  for  they  can  be  found 
in  plenty ;  but  taken  as  a  whole  "Wall  Street  performs  its 
work  with  integrity  and  skill,  and  at  a  price  regulated 
by  the  law  of  supply  and  demand.  The  profit  of  a  bank- 
ing house,  in  the  flotation  of  a  bond  issue,  may  seem  at 
times  enormous,  but  that  depends  upon  the  point  of  view, 
and  all  the  conditions  involved  in  the  transaction.  The 
farmer  who  has  to  sell  his  apples  at  $1.50  a  barrel,  and 
then  sees  them  retailed  from  a  fruit  stand  in  Wall  Street 
at  five  cents  a  piece,  may  think  that  he  has  been  robbed, 
whereas  he  may  have  obtained  exactly  the  fair  price.  His 
apples  will  rot  in  his  orchard  if  he  can  not  find  buyers 
for  them.  The  buyers  must  either  come  to  the  apples  or 
the  apples  must  be  carried  to  the  buyers.  The  farmer 
has  not  the  facilities  to  bring  his  product  to  the  con- 
sumer ;  others  must  perform  that  service  for  him  and  they 
must  be  paid.  Therefore  a  dollar  and  a  half  a  barrel  at 
the  farm,  and  five  cents  apiece  on  the  streets  of  New  York 
may  both  be  equitable  and  honorable  prices. 

Nowhere  else  in  the  world  is  actual  money  handled 
with  such  a  minimum  of  loss,  through  dishonesty  and 
carelessness,  as  in  Wall  Street;  and  in  its  credit  and  se- 
curity transactions  it  compares  well  for  good  faith  and 
efficiency  with  any  other  department  of  human  endeavor. 

Seat  of  Stock-  and  Money-Markets. — Wall  Street  is  the 
seat  of  (1)  The  Stock-Market ;  (2)  The  Money-Market. 
Each  is  distinct  from  the  other,  but  both  are  interde- 
pendent. The  Stock  Exchange  is  the  head  of  one  and 
the  Bank  Clearing-House  of  the  other. 

The  Stock-Market  is  a  place  where  securities  may  be 
bought  or  sold  (a)  for  investment;  (b)  for  speculation.' 


48  WORK  OF  WALL  STREET 

By  its  facilities  for  investment  and  speculation  the  Stock- 
Market  brings  together  those  who  have  capital  to  invest, 
and  those  who  need  capital  fbr  new  enterprises  or  addi- 
tional capital  for  old  enterprises.  It  thus  aids  in  the 
distribution  of  wealth  and  the  development  of  the  coun- 
try. It  brings  into  the  service  of  business  enterprise  the 
savings  of  the  thrifty,  and  enables  hundreds  of  thousands 
of  persons  to  put  their  savings  into  mighty  enterprises. 

The  money  market  is  in  four  main  divisions  all  closely 
allied  to  each  other,  and  having  many  subdivisions: 

(a.)  Foreign  exchange,  by  which  the  operations  of 
international  enterprise  and  international  commerce  are 
financed ; 

(b.)  Domestic  credits  by  which,  through  checks  and 
commercial  paper,  food  and  merchandise  are  marketed 
and  the  manifold  needs  of  inland  trade  cared  for ; 

(c.)  Promotion,  by  which  corporate  and  other  large 
enterprises  are  created,  underwritten  and  financed; 

(d.)  Stock  Exchange  loans,  both  on  call  and  time,  by 
which  investment  and  speculative  transactions  in  securi- 
ties are  made  possible. 

REFERENCES 
Suggested  Reading 

"The  Scope  and  Function  of  the  Stock  Market,"  S.  S.  Huebner 
in  Annals  of  American  Academy  of  Political  and  Social 
Science,  May,  1910. 

"Wall  Street  and  the  Country,"  Charles  A.  Conant,  1904. 


CHAPTER  IV 
SCOPE  OF  WALL  STREET 

"With  the  rapid  conversion  of  all  forms  of  business 
into  stock  corporations,  there  has  been  a  remarkable  ex- 
pansion in  the  scope  of  the  world's  stock-markets  during 
the  past  third  of  a  century.  In  the  United  States  the 
great  bulk  of  the  wealth  of  the  country  is  now  repre- 
sented by  stock  and  bond  certificates.  In  1904,  the  na- 
tional wealth  was  officially  computed  at  $107,000,000,000. 
In  1911  it  was  estimated  at  $125,000,000,000.  In  1905  it 
was  computed  by  a  competent  statistician  *  that  the  total 
outstanding  stocks  and  bonds  issued  by  American  corpo- 
rations amounted  to  over  $34,500,000,000,  which  was  32 
per  cent,  of  the  total  wealth  of  this  country  in  the  preced- 
ing year,  and  31  per  cent,  of  the  world's  total  of  negotia- 
ble securities.  But  this  amount,  imposing  as  it  is,  repre- 
sented only  the  more  important  corporations  issuing 
stocks  and  bonds,  and  did  not  touch  a  vast  aggregate  of 
securities  issued  by  small  industrial  and  mercantile  con- 
cerns. A  much  better  and  later  measure  of  the  scope 
of  the  American  stock  markets  is  afforded  by  the  returns 
made  to  the  United  States  Commissioner  of  Internal  Reve- 
nue by  the  corporations  paying  the  special  excise  tax 
under  the  corporation  tax  law  enacted  in  1909. 

Amount  of  Securities. — From  these  returns  it  appears 
that  on  June  30,  1910,  there  were  262,490  corporations 
in  the  United  States  having  capital  stock  amounting  to 
$52,371,626,752  and  bonded  and  "other  indebtedness" 
amounting  to  $31,332,952,696,  a  total  of  $83,705,579,448. 
Making  allowance  for  the  ' '  other  indebtedness, ' '  not  rep- 

*  Charles  A.  Conant. 

49 


50  WORK  OF  WALL  STREET 

resented  by  certificates,  it  is  probable  that  the  total  of 
stocks  anfl  bonds  issued  by  American  corporations  is  in 
the  neighborhood  of  $75,000,000,000,*  which  is  about  60 
per  cent,  of  the  nation 's  wealth,  and  is  moreover  the  most 
important  part  of  that  wealth,  because  it  controls,  not 
only  many  of  the  sources  of  production,  but  practically 
all  of  the  agencies  of  transportation  and  credit.  Of  these 
262,490  corporations,  89,384  are  manufacturing  and 
mining,  54,673  mercantile,  29,812  financial,  24,252  public 
service  and  64,359  miscellaneous. 

Their  Distribution. — It  is  impossible  by  statistics  to 
determine  the  number  of  persons  owning  this  immense 
total  of  securities.  But  the  number  of  individual  hold- 
ers is  very  large,  and  the  number  of  persons  having  an 
indirect  ownership  through  their  interest  in  co-operative 
associations,  such  as  mutual  savings  banks  and  insur- 
ance companies,  is  still  greater.  A  leading  authority  t 
estimated  that  the  capital  stock  of  234  leading  railroad 
and  industrial  corporations  amounting  to  $10,711,- 
575,719  was  in  1911  held  by  980,399  persons.  -If  the 
same  proportion  held  for  the  entire  $52,000,000,000  of 
capital  stock  in  the  United  States,  there  are  over 
4,000,000  of  shareholders  in  the  country,  not  counting 
the  owners  of  bonds.  As  there  are  many  persons  who 
hold  stocks  in  several  companies,  and  as  there  are  a 
multitude  of  companies  in  which  there  are  only  a  hand- 
ful of  shareholders,  this  total  is  undoubtedly  an  over- 
estimate. Nevertheless  the  number  of  individual  own- 
ers of  securities  forms  a  large  and  important  element 
in  the  community.  Moreover  the  savings  banks  in  the 

*To  this  total  should  be  added  the  United  States  and  the  State, 
County  and  municipal  bonds  amounting  to  over  $3,000,000,000,  to 
obtain  the  aggregate  of  the  negotiable  securities  in  the  United  States. 
In  1900  the  total  of  the  world's  negotiable  securities  was  estimated 
at  $111,077,764,333. 

t  The  "New  York  Journal  of  Commerce  and  Commercial  Bulletin, 
December  20,  1911. 


SCOPE  OF  WALL  STREET  51 

country  hold  $1,797,111,826  of  stocks  and  bonds  which 
are  thus  owned  by  over  9,000,000  of  depositors.  The 
ordinary  and  industrial  life  insurance  companies  are  also 
big  holders  of  securities  which  are  thus  indirectly  owned 
by  the  holders  of  about  28,000,000  policies.  Undoubt- 
edly there  is  a  very  considerable  degree  of  concentra- 
tion of  the  control  of  the  administration  of  wealth 
through  directorships,  but  never  before  in  our  national 
history  has  there  been  so  wide  a  distribution  of  wealth, 
and  this  wide  distribution  has  been  made  possible  by 
the  stock  company  form  of  carrying  on  the  productive 
and  distributive  business  of  the  country.  Directly  or 
indirectly  nearly  every  family  in  the  United  States  has 
an  interest  in  the  stock-markets,  and  the  prosperity  or 
depression  of  the  corporations  affects  the  incomes  of  a 
vast  and  increasing  proportion  of  the  people  of  the  coun- 
try. 

Bank  Credits  Based  on  Securities. — Moreover  stock 
and  bond  securities  form  the  basis  of  a  large  part  of  the 
bank  credits  of  the  United  States.  In  1910,  the  loans 
and  discounts  of  the  national  and  state  banking  institu- 
tions amounted  to  $12,500,000,000,  of  which  one-third  was 
secured  by  stocks  and  bonds. 

The  $75,000,000,000  stocks  and  bonds  in  the  United 
States  are  not  all  represented  in  the  New  York  stock- 
market.  Every  city  of  considerable  size  has  its  own  lit- 
tle stock-market  in  which  local  securities  are  dealt  in, 
while  twelve  large  cities  *  outside  of  New  York  have 
stock-markets  organized  and  regulated  by  stock  ex- 
changes. 

But  the  New  York  stock-market  is  the  largest  in  the 
country,  and  is  the  main  market  for  the  stocks  and  bonds 

*  Boston,  Philadelphia,  Baltimore,  Chicago,  St.  Louis,  Pittsburg, 
Denver,  Kansas  City,  San  Francisco,  Los  Angeles,  Seattle,  New  Or- 
leans. 


52  WORK  OF  WALL  STREET 

of  all  the  important  corporations  of  the  country,  upwards 
of  one-third  of  all  the  securities  issued  in  the  United 
States  being  listed  on  the  New  York  Stock  Exchange. 

Listed  Securities. — In  1902  when  the  first  edition  of 
this  book  was  written  there  were  $13,791,866,317  of  listed 
and  $1,227,219,645  of  unlisted  securities,  making  a  total 
of  $15,019,085,962  stocks  and  bonds  admitted  to  dealings 
in  the  Exchange.  On  October  15,  1906,  the  total  was 
$20,267,223,166.  Since  the  Hughes  Commission  inquiry 
the  unlisted  department  has  been  abolished,  but  so  great 
has  been  the  growth  in  the  output  of  securities,  that  on 
October  18, 1911,  there  were  $24,374,081,323  of  stocks  and 
bonds  listed  for  trading  in  the  Exchange.  This  is  an 
average  increase  of  about  one  thousand  million  dollars 
a  year.  The  expansion  between  1902  and  1906  was, 
however,  greater  than  between  1906  and  1911.  In  1868 
it  was  estimated  that  $3,000,000,000  of  securities  were 
admitted  to  trading  in  the  then  existing  two  stock 
boards,  and  the  increase  from  that  total  to  over  $24,000,- 
000,000  in  1911,  shows  how  enormous  has  been  the 
growth  in  the  number  and  size  of  corporations  in  43 
years. 

The  following  table  shows  the  amount  of  each  class 
of  securities  listed  on  the  New  York  Stock  Exchange 
October  18,  1911: 

STOCKS.  1911. 

Bank  stocks  $  115,570.000. 

Trust  Company  stocks  6,500,000. 

Railroad    stocks    5.908.836,650. 

Manufacturing  and  Industrial  stocks   3,341,039,750. 

Street  Railway  stocks   468,980,600. 

Express   Company   stocks    63.967,300. 

Mining  stocks    467,062,650. 

Coal  and  iron  stocks   143,520,300. 

Gas  and  electric  light  stocks  256,198.000. 

Telegraph  and  telephone  stocks 548,916,200. 

Miscellaneous   stocks    294,023,900. 


Total    stocks    $11.683,795,350. 


SCOPE  OF  WALL  STREET  53 

BONDS. 

Railroad    bonds    $  7,539,408,100. 

Street  Railway  bonds    .- 511,283,000. 

United   States   bonds    897,890,530. 

Foreign  government  bonds   1,879,359,000. 

State  government  bonds   121,711,693. 

Gas  and  electric  light  bonds  241,138,000. 

Manufacturing  and  industrial  bonds    679,480,350. 

Coal  and  iron  bonds    103,545,300. 

Telegraph  and  telephone  bonds  246,497,500. 

City  and  county  bonds   20,055,000. 

New  York  City  securities  449,917,500. 


Total    bonds    $12,690,285,973. 

Aggregate  stocks  and  bonds   $24,374,081,323. 

EXPANSION  IN  FORTY-THREE  YEARS. 

Total  securities  Listed. 

1868   (estimated)    $  3,000,000,000. 

1902    15,019,085,962. 

1911    24,374,081,323. 

Railroad  Securities. — An  inspection  of  this  table  shows 
how  largely  railroad  securities  predominate  in  the  mar- 
ket. They  aggregate  over  55%  of  the  total  listings,  and 
they  have  increased  since  1902  from  9,129  millions  to 
13,507  millions ;  and  this  great  expansion  has  taken  place 
notwithstanding  the  period  has  been  one  of  rapid  ex- 
tension of  governmental  control  over  railroad  rates  and 
railroad  securities,  even  to  the  matter  of  valuation  and 
capitalization.  Manufacturing  and  industrial  stocks  and 
bonds  have  in  the  same  time  increased  from  2,808  mil- 
lion dollars  to  4,020  million  dollars. 

Foreign  Securities  Listed. — A  notable  development  of 
the  past  ten  years  has  been  in  the  widening  as  well  as  in 
the  increased  volume  of  the  market.  In  the  first  edition 
it  was  noted  that  "practically  every  dollar"  of  the  se- 
curities admitted  to  dealings  in  the  Stock  Exchange 
"represents  American  investments."  In  1911,  on  the 
other  hand,  foreign  government  bonds  to  an  amount  of 
$1,879,359,000  were  on  the  list  as  compared  with  $119,- 
529,600  in  1902.  Government  securities  of  Argentina, 


54  WORK  OF  WALL  STREET 

Bolivia,  China,  Cuba,  Dominican  Republic,  Germany, 
Japan,  Mexico  and  Russia  are  now  traded  in  on  the 
New  York  Stock  Exchange.  Among  other  foreign  se- 
curities (not  governmental)  that  are  also  listed  are  rail- 
roads of  Canada  and  Mexico,  street  railways  of  London 
and  Havana,  and  irrigation  of  South  America.  Every 
section  of  the  United  States,  as  well  as  the  Philippines, 
is  represented  in  the  list.  In  all  there  are  1,461  different 
securities  on  the  list  against  1,286  in  1902;  of  bonds 
there  are  1,023  including  720  railroad  issues. 

Comparison  With  London. — Wide  as  the  scope  of  the 
New  York  Stock  Exchange  is — and  as  has  been  seen  it 
is  widening  so  as  to  cover  the  American  Continent  more 
completely  and  to  include  even  foreign  countries — it  is 
still  more  national  than  international  and  is  much  less 
comprehensive  than  the  London  Stock-Market,  though 
in  volume  of  speculative  transactions  it  is  undoubtedly 
greater. 

In  London  the  securities  of  every  country  and  nearly 
every  large  city  on  the  globe  are  dealt  in,  to  the  number 
of  over  4,000.  The  principal  securities  of  the  United 
States  are  traded  in  there,  and  the  Americans  often  form 
an  important  factor  in  the  market.  Such  widely  sep- 
arated countries  as  Argentina  and  Persia,  China  and 
Canada,  Roumania  and  Chili,  India  and  Mexico,  Russia 
and  Venezuela,  Italy  and  Cuba,  Morocco  and  Servia  are 
represented  on  the  list.  London,  New  York,  Moscow, 
Montreal,  Pekin,  Buenos  Ayres,  Calcutta,  Milwaukee, 
Hong  Kong,  Rio  de  Janeiro,  Manila  and  Cape  Town  are 
among  the  cities  whose  governments  or  corporations  con- 
tribute to  the  greatness  of  the  London  market.  Any 
one  who  undertakes  to  obtain  a  grasp  upon  such  a  mar- 
ket must  take  a  world  view  of  things;  and  indeed  the 
fully  equipped  modern  banker  is  at  once  business  man, 
political  economist,  diplomat  and  statesman.  On  a  re- 


SCOPE  OF  WALL  STREET  55 

cent  day  described  as  "dull,"  quotations  were  estab- 
lished in  London  for  14  English  government  bonds,  17 
Egyptian  securities,  17  Colonial  government  bonds,  66 
other  foreign  government  bonds,  20  foreign  city  stocks, 
43  American  and  38  English  railroad  stocks,  or  to  use 
the  London  term  "rails";  11  Mexican  and  16  Colonial 
"rails,"  9  underground  "rails,"  16  motor  stocks,  4  land 
company  stocks,  24  food  company  stocks,  16  hotel  stocks, 
9  tobacco  stocks,  217  rubber  stocks,  90  oil  stocks,  89  tea 
stocks,  50  brewery  stocks,  43  bank  stocks,  23  drapery 
and  warehouse  stocks,  19  telegraph  and  telephone  stocks, 
17  newspaper  stocks,  19  nitrate  stocks,  13  theater  stocks, 
12  gas  stocks,  besides  many  others;  all  of  which  goes  to 
show  how  far  reaching  the  stock  company  method  of 
conducting  business  has  been  carried,  and  how  naturally 
these  stocks,  gravitate  to  a  great  central  market  repre- 
senting immense  investment  capital.  In  1909  the  total 
par  value  of  all  securities  quoted  in  the  London  Stock 
Exchange  amounted  to  about  $51,000,000,000. 

England  and  France  are  notable  for  their  stores  of 
capital  invested  abroad,  because  the  opportunities  for 
investment  at  home  are  comparatively  limited.  Both 
have  many  billions  $f  dollars  invested  in  the  securities 
of  other  nations.  England's  aggregate  of  exported  cap- 
ital is  estimated  at  $17,500,000,000,  of  which  one-half  is 
invested  in  British  Colonies  and  one-half  in  foreign  coun- 
tries. Sir  Edgar  Speyer  has  estimated  that  in  1911 
Great  Britain  received  $900,000,000  in  interest  on  her 
foreign  investments.  The  foreign  investments  of  the 
United  States  are  infinitesimal  as  compared  with  those 
of  England,  France  or  even  of  Germany  and  Holland, 
but  they  are  increasing.  This  interchange  of  capital  be- 
tween nations  promotes  international  trade  and  good 
will.  By  the  magnitude  of  its  market  New  York  has 

become  one  of  the  four  capitals  of  the  world. 
6 


56  WORK  OF  WALL  STREET 

With  London,  Paris,  and  Berlin  it  stands  as  one  of 
the  four  great  international  money-markets  and  its  in- 
fluence is  felt  everywhere  that  the  credit  system  extends. 

Foreign  Commerce. — The  volume  of  the  foreign  ex- 
change transactions  of  New  York  it  is  impossible  to  esti- 
mate. There  are  no  statistics  on  the  subject;  and  the 
Bureau  of  Statistics  at  "Washington,  it  seems,  has  found 
it  impracticable  to  obtain  them,  valuable  as  they  would 
be.  The  great  bulk  of  the  foreign  commerce  of  the 
United  States  which  in  1910  amounted  to  $3,564,339,325, 
of  which  $1,727,006,057  or  48.4  per  cent,  of  the  whole 
passed  through  New  York,  was  financed  in  Wall  Street. 
But  in  addition  to  this  the  foreign  exchange  markets  of 
Wall  Street  conducts  an  immense  business  in  the  trans- 
fer of  credits  back  and  forth  between  the  United  States 
and  foreign  countries  in  payment  of  travelers'  checks, 
security-investments,  money  borrowed  and  other  items 
of  "invisible"  exchange. 

Domestic  Commerce. — The  domestic  commerce  of  the 
country  aggregates  probably  over  twenty-five  billions  of 
dollars  a  year,  and  of  this  amount  it  is  fair  to  estimate 
that  over  one-half  is  financed  in  New  York.  The  total 
bank  clearings  of  the  United  States  in  1911  were  $158,- 
767,986,959,  of  which  $92,372,812,735  were  in  the  New^ 
York  Clearing-House.  For  twenty-five  years  New 
York's  proportion  of  the  total  bank  clearings  of  the 
United  States  has  been  about  60  per  cent.  This  gives 
as  fair  an  indication  of  the  scope  of  the  Wall  Street 
money-market  as  it  is  possible  to  arrive  at. 

The  banking  power  of  the  United  States  in  1910  was 
$21,049,244,383,  of  which  $4,770,180,483  was  in  the  City 
of  New  York.  This  made  22.86  per  cent,  of  the  whole, 
but  New  York's  total  as  thus  given  does  not  include 
the  big  private  banks,  two  or  three  of  which  have  re- 
sources greater  than  that  of  any  public  institution.  In 


SCOPE  OF  WALL  STREET 


57 


1908  it  was  computed  that  New  York's  banking  power 
amounted  to  nearly  10  per  cent,  of  the  banking  power 
of  the  world.* 

REFERENCES 

"The    World's    Wealth    in    Negotiable    Securities,"    Charles    A 

Conant,  Atlantic  Monthly,  January,  1908. 
"Stocks  and  the  Stock  Market,"  Annals  of  American  Academy, 

May,   1910. 


The  following  is  a  record 

New  York. 
.  ..$  92,372,812,735 
. . .  97,274,500,092 
...  103,588,738,320 
. . .  79,275,880,256 
. . .  87,182,168,381 
...  104,675,828,656 
...  93,822,060,202 
.....  68,649,418,673 
, . . .  65,970,337,955 
....  76,328,189,165 
....  79,427,685,842 
....  52,634,201,865 
....  60,761,791,901 
....  41,971,782,437 
....  33,427,027,471 


of  bank  clearings  from  1897  to  1911: 


Outside  New  York. 
$66,395,174,224 
65,629,630,337 
61,564,713,413 
52,819,835,592 
57,589,507,214 
55,259,903,059 
50,169,568,273 
43,962,703,717 
43,238,849,809 
41,695,109,575 
38,982,329,340 
33,436,347,818 
33,285,608,882 
26,854,774,887 
23,802,043,485 


Total. 

$158,767,986,959 

162,904,130,429 

165,153,451,763 

132,095,715,848 

140,771,675,595 

159,935,731,715 

143,901,628,475 

112,612,122,390 

109,209,187,764- 

118,023,298,740 

118,410,015,182 

86,070,549,683 

94,047,400,783 

68,826,557,324 

57,229,070,956 


CHAPTER  V 
THE  STOCK-MARKET 

Two  questions  confront  us  at  the  threshold  of  this 
subject : 

1.  What  is  a  stock-market? 

2.  Why  is  there  a  stock-market? 

An  answer  to  one  is  practically  an  answer  to  the  other. 

A  stock-market  is  an  income  market.  It  is  a  place 
where  incomes  are  bought  and  sold.  No  one,  it  is  true, 
goes  to  the  Stock  Exchange  as  he  might  to  an  insurance 
company,  and,  paying  over  the  requisite  amount  of 
'money,  buys  an  annuity.  Yet,  essentially,  the  stock- 
market  operation  is  the  same.  The  stocks  and  bonds 
traded  in  on  the  Stock  Exchange  would  be  worthless 
unless  they  represented  value  either  present  or  prospec- 
tive. Bonds  and  preferred  stock  generally  represent 
fixed  income.  Common  stocks  represent  speculative  in- 
come— that  is,  income  that  may  vary  from  year  to  year, 
according  to  the  earning  capacity  of  the  corporations 
issuing  them.  If  a  company  has  no  income  and  no 
prospect  of  earning  one,  its  securities  are  worth  no  more 
than  so  much  waste  paper.  It  is  true  that  the  stocks 
of  an  insolvent  company  are  often  quoted  in  the  market, 
but  their  value  consists  in  the  control  of  the  charter,  the 
franchise,  or  some  other  privilege  from  which  it  is  be- 
lieved an  income  may  some  time  be  derived.  Several 
years  ago  a  list  of  48  non-dividend-paying  stocks  was 
published  whose  average  markyt  price  was  41,  but  every 
one  enjoyed  the  prospect,  immediate  or  remote,  of  future 
dividends.  There  would  be  no  stock-market  if  there  were 
no  incomes. 

•     5F 


THE  STOCK-MARKET  59 

In  Paris  an  investor  will  say  to  his  broker,  "Buy  me 
enough  rentes  to  pay  me  an  income  of,  say,  50,000  francs 
a  year. ' '  He  goes  into  the  market  to  buy  not  rentes,  but 
income.  In  New  York  the  investor  does  not  express 
himself  so  directly.  He  says  to  his  broker,  "Buy  me 
$500,000  of  bonds."  Now,  what  he  is  actually  buying 
is  not  bonds,  but  the  income  the  bonds  will  yield.  Be- 
fore placing  the  order  he  has  calculated  exactly  what 
will  be  the  income,  taking  into  account  the  premium 
paid,  the  interest  promised,  and  the  duration  of  the  bond. 
All  investments  are  thus  made  on  the  income  basis. 

Beginnings  of  the  Market. — The  stock-market,  there- 
fore, rests  upon  a  sound  economic  basis.  In  telling  what 
it  is  we  have  indicated  clearly  why  it  is.  Writing  of 
the  beginnings  of  the  English  stock-market  more  than 
two  centuries  ago,  Macaulay  says: 

During  the  interval  between  the  Restoration  and  the  Revolu- 
tion the  riches  of  the  nation  had  been  rapidly  increasing. 
Thousands  of  busy  men  found  every  Christmas  that  after  the  ex- 
penses of  the  year's  housekeeping  had  been  defrayed  out  of  the 
year's  income  a  surplus  remained ;  and  how  that  surplus  was  to 
be  employed  was  a  question  of  some  difficulty.  In  our  time,  to 
invest  such  a  surplus  at  something  more  than  3  per  cent,  on  the 
best  security  that  has  ever  been  known*  in  the  world  is  the  work 
of  a  few  minutes.  But  in  the  seventeenth  century  a  lawyer,  a 
physician,  or  retired  merchant,  who  had  saved  some  thousands 
and  who  wished  to  place  them  safely  and  profitably,  was  often 
greatly  embarrassed.  Three  generations  earlier,  a  man  who  had 
accumulated  wealth  in  a  profession  generally  purchased  real 
property  or  lent  his  savings  on  mortgage.  But  the  number  of 
acres  in  the  Kingdom  had  remained  the  same,  and  the  value  of 
those  acres,  though  it  had  greatly  increased,  had  by  no  means 
increased  as  fast  as  the  quantity  of  capital  seeking  for  employ- 
ment. Many,  too,  wished  to  put  their  money  where  they  could 
find  it  at  an  hour's  notice,  and  looked  about  for  some  species  of 
property  which  could  be  more  readily  transferred  than  a  house 
or  a  field.  There  were  a  few  joint-stock  companies,  among  which 
the  East  India  Company  held  the  foremost  place;  but  the  de- 


60  WORK  OF  WALL  STREET 

mand  for  the  stock  of  such  companies  was  far  greater  than  the 
supply.  Indeed,  the  cry  for  a  new  East  India  Company  was 
chiefly  raised  by  persons  who  found  difficulty  in  placing  their 
savings  at  interest  on  good  security.  So  great  was  that  difficulty 
that  the  practise  of  hoarding  was  common. 

Where  there  is  a  demand  a  supply  is  usually  found. 
Out  of  this  condition  of  things  grew  the  English  stock- 
market,  and  by  1688  stock-jobbing  was  in  full  swing  in 
London.  Macaulay  goes  on  to  describe  the  output  of 
new  companies  at  this  period.  A  crowd  of  projectors, 
ingenious  and  absurd,  honest  and  knavish,  employed 
themselves  in  devising  new  schemes  for  the  employment 
of  redundant  capital.  Some  of  the  companies  took  large 
mansions  and  printed  their  advertisements  in  gilded  let- 
ters. Jonathan's  and  Garroway's  were  in  a  constant 
ferment  with  brokers,  buyers,  sellers,  and  meetings  of 
directors.  Extensive  combinations  were  formed,  and 
monstrous  fables  were  circulated  for  the  purpose  of  rais- 
ing or  depressing  the  prices  of  shares. 

An  impatience  to  be  rich  [he  added],  a  contempt  for  those 
slow  but  sure  gains  which  are  the  proper  reward  of  industry, 
patience,  and  thrift,  spread  through  society.  It  was  much  easier 
and  much  more  lucrative^to  put  forth  a  lying  prospectus  announc- 
ing a  new  stock,  to  persuade  ignorant  people  that  the  dividends 
could  not  fall  short  of  20  per  cent,  and  to  part  with  £5,000  of 
this  imaginary  wealth  for  10,000  solid  guineas  than  to  load  a 
ship  with  a  well-chosen  cargo  for  Virginia  or  the  Levant. 

Macaulay 's  account  of  the  first  English  stock-market 
and  the  evils  to  which  it  gave  rise,  serves  as  a  descrip- 
tion of  the  stock-market  of  to-day.  It  shows  at  once  the 
legitimate  reason  for  such  a  market  and  the  evils  to 
which  it  is  exposed.  "We  hear  so  much  of  the  evils  that 
we  are  apt  to  overlook  the  fact  that  the  stock-market 
represents  the  thrift  and  enterprise  of  the  people  even 
more  than  it  does  their  gambling  propensities. 


THE  STOCK-MARKET  61 

Value  of  Organized  Stock-Market. — Wall  Street  is 
commonly  pictured  in  the  newspapers  as  an  American 
Monte  Carlo.  But  it  has  been  well  said  that  there  is 
no  great  modern  nation  without  a  Stock  Exchange.  The 
first  Napoleon,  who  had  a  keen  appreciation  of  every- 
thing that  contributed  to  the  glory  of  France,  did  not 
deem  it  beneath  his  dignity  to  lay  the  corner-stone  of 
the  Paris  Bourse.  John  R.  Dos  Passos  has  said  that  "it 
is  absolutely  certain  that  without  the  existence  of  great 
public  marts,  like  the  New  York  and  London  Stock  Ex- 
changes, the  marvelous  development  and  progress  of  this 
country,  which  make  it  the  wonder  and  admiration  of 
the  world,  would  not  have  been  attained."  He  quotes 
Judge  Bramwell,  in  a  leading  English  case,  as  deciding 
that  it  is  no  disadvantage  that  there  should  be  a  market 
where  speculation  may  go  on,  for  it  is  owing  to  a  market 
of  this  kind  that  there  are  so  many  railroads  and  other 
useful  undertakings. 

Investment  of  Savings. — The  Stock  Exchange  provides 
a  place  for  the  investment  of  savings.  A  distinct  im- 
morality attaches  to  hoarding,  but  investment  carries  a 
double  blessing:  it  benefits  the  investor  and  those  who 
have  the  use  of  the  money.  There  is  a  limit  to  real  es- 
tate investments.  Not  everybody  can  put  their  surplus 
money  into  land.  There  must  be  other  objects  of  in- 
vestment. So  capitalists,  large  and  small,  enter  the 
stock-market.  The  mechanic  who  puts  his  few  dollars 
into  the  savings  bank  enters  the  stock-market  by  proxy; 
the  bank  invests  his  money  for  him,  some  of  it  in  real 
estate,  some  in  securities.  The  professional  man  who 
buys  an  insurance  policy  enters  the  stock-market  by 
proxy;  the  insurance  company  invests  its  assets  very 
largely  in  securities.  When  it  is  said  *  that  there  are 

*  See  chapter  on  "Scope  of  Wall  Street." 


62  WORK  OF  WALL  STREET 

in  the  United  States  9,000,000  savings  bank  depositors 
and  more  than  28,000,000  life-insurance  policies,  it  is  seen 
how  large  a  proportion  of  the  population  is  at  all  times 
thus  indirectly  concerned  in  the  stock-market.  Business 
men  and  others  enter  Wall  Street  directly,  for  the  pur- 
pose of  investment  of  the  profits  of  their  own  business. 
The  stock-market,  therefore,  performs  the  most  benefi- 
cent function  of  providing  a  place  wh'ere  investments 
can  be  made  and  incomes  secured. 

Marketability. — As  practically  all  large  business  af- 
fairs are  now  carried  on  by  companies,  it  follows  that 
stocks  and  bonds  constitute  about  the  only  form  of  in- 
vestment outside  of  real  estate.  And  they  are  the  best 
form  of  investments;  first,  because  they  are  so  easily 
converted  into  cash,  and,  second,  because  they  are  so 
easily  hypothecated  for  loans.  There  is  always  a  market 
for  securities  in  Wall  Street.  There  has  never  been  a 
time  in  recent  years  when  a  stock  or  bond  of  which  Wall 
Street  possessed  any  knowledge  could  not  be  sold  there, 
provided  the  price  was  satisfactory.  A  man  can  con- 
vert a  fortune  into  money  in  a  day,  or,  like  Andrew 
Carnegie,  capitalize  his  entire  business  in  a  single  opera- 
tion. To  obtain  a  loan  on  real  estate  one  is  put  to  con- 
siderable expense  and  labor.  There  must  be  a  search 
of  the  title,  and  the  mortgage  to  secure  the  loan  must 
be  'duly  recorded.  But  to  obtain  a  loan  on  marketable 
securities,  all  one  has  to  do  is  to  carry  them  in  an  en- 
velope to  a  lender  of  money,  and  the  line  of  credit  may 
be  obtained  in  a  few  minutes. 

The  stock-market  exists,  therefore,  because  the  busi- 
ness of  the  age  has  need  of  it,  because  it  is  essential  to 
civilization.  But,  like  everything  else  human,  this  use- 
ful agency  of  thrift  and  enterprise  is  liable  to  abuse. 
Macaulay  has  shown  how  more  than  two  centuries  ago 
men  who  had  saved  money  sought  to  invest  it,  an  act  of 


THE  STOCK-MARKET  63 

the  highest  wisdom,  and  how  the  demand  for  investment 
grew,  first  into  a  craze  for  speculation,  and  finally  into 
gambling  and  fraud. 

In  Wall  Street,  upon  the  substantial  foundation  of  in- 
vestment, has  been  built  a  vast  superstructure  of  specula- 
tion. Speculation  is  an  investment  of  money  in  which 
large  risk  is  taken  in  expectation  of  great  gain.  But  it 
is  not  easy  to  draw  the  line  where  investment  ends  and 
speculation  begins.  In  Wall  Street  such  a  line  is  drawn, 
but  it  is  an  arbitrary  division.  When  a  security  is 
bought  and  paid  for  in  full,  put  away  in  a  place  of  safe 
keeping  and  held  for  the  income  it  yields — that  is  called 
an  investment.  The  great  bulk  of  the  dealings  in  bonds 
are  for  investment.  When  a  security  is  bought  on  mar- 
gin and  held  for  sale  as  soon  as  the  price  advances — 
that  is  speculation.  The  bulk  of  the  dealings  in  stocks 
are  speculative. 

Credit  in  Speculation. — But  speculation  may  be  as 
truly  an  investment  as  investment  itself.  Most  investors 
who  pay  outright  for  their  securities  are  ready  to  sell 
them  again  at  a  profit.  They  buy  them  for  the  incomes, 
but  if  the  advance  in  price  is  large  enough,  the  profit  in 
selling  may  be  more  attractive  than  the  profit  in  keep- 
ing. On  the  other  hand,  the  speculator  buys  on  a  mar- 
gin to  sell  again  on  a  rising  price,  but  he  buys  and  sells 
on  an  income  basis  the  same  as  the  investor.  All  whole- 
sale business  in  modern  trade  is  done  on  credit,  which 
is  only  another  form  of  the  Wall  Street  system  of  mar- 
gins. The  merchant  who  restricts  his  purchases  to  the 
amount  his  cash  capital  can  pay  for  in  full,  must  do  a 
comparatively  small  business.  The  wholesaler's  capital, 
in  a  certain  sense,  corresponds  to  the  speculator's  mar- 
gin. The  former  buys  on  time  and  borrows  of  the  bank 
the  money  to  pay  for  the  goods  as  the  time  for  payment 
approaches.  With  a  capital  of  $100,000  he  may  buy,  say, 


64  WORK  OF  WALL  STREET 

$500,000  worth  of  goods.  It  is  only  by  a  system  of  cred- 
its that  the  great  operations  of  modern  business  can  be 
conducted.  The  speculator  buys  stocks,  like  the  mer- 
chant, on  credit.  With  a  capital  of  $10,000  the  investor 
can  buy  100  shares  of  stock,  selling  at  par  value  of 
$100  per  share,  and  pay  for  them  in  full.  But  with 
$10,000  deposited  as  a  margin  the  speculator  can  buy  ten 
times  as  much  stock,  with  the  chance  of  realizing  ten 
times  the  profit.  Of  course  the  risk  is  much  greater. 
If  the  price  declines  the  speculator  may  lose  his  entire 
margin  or  capital;  but  the  merchant  also  runs  a  risk 
in  buying  goods  in  excess  of  the  amount  of  his  capital. 
Except  that  there  is  a  greater  mobility  in  the  stock- 
market  than  in  other  markets,  so  that  changes  in  prices 
are  more  rapid  and  extreme,  the  risk  in  both  cases  is 
equal. 

The  operations  of  the  merchant  and  the  speculator  are 
therefore,  in  the  last  analysis,  essentially  the  same,  ex- 
cept that  the  speculator's  risks  are  larger.  If  all  busi- 
ness, whether  in  stocks  or  in  trade,  were  conducted 
strictly  on  the  cash  or  investment  basis,  the  transactions 
would  be  very  limited.  Credit  means  expansion  and  ac- 
tivity. In  times  of  panic,  when  credit  is  withdrawn, 
speculation  ceases,  and  all  business  becomes  of  the  in- 
vestment order.  Then  stagnation  sets  in,  wages  fall,  and 
wide-spread  suffering  is  caused.  Some  one  has  said  that 
speculation  is  "a  disease  of  the  mind";  but  Henry  Clews, 
in  his  testimony  before  the  Legislative  Committee  which 
investigated  corners  in  1881,  gave  a  far  better  definition. 
He  said  that  "speculation  is  a  method  for  adjusting  dif- 
ferences of  opinion  as  to  future  values,  whether  of 
products  or  of  stocks.  It  regulates  production  by  in- 
stantly advancing  prices  when  there  is  a  scarcity,  thereby 
stimulating  production,  and  by  depressing  prices  when 
there  is  an  overproduction." 


THE  STOCK-MARKET  65 

Gambling  a  Disease. — There  is  a  point,  however,  where 
speculation  becomes  a  disease  of  the  mind :  it  is  the  point 
where  it  changes  into  mere  gambling.  If  it  is  difficult 
to  draw  the  line  between  investment  and  speculation,  it 
is  still  more  difficult  to  draw  that  between  speculation 
and  gambling.  Yet  there  is  a  difference  between  the 
two,  although  many  critics  of  Wall  Street  fail  to  see  it. 
The  speculator  may  be  defined  as  a  man  who,  making 
a  study  of  business  conditions  and  of  the  earning  power 
of  the  companies  in  whose  stocks  he  purposes  to  trade, 
buys  because  he  believes  that  prices  ought  to  advance, 
or  sells  because  he  believes  they  will  fall;  and  does  so 
on  a  margin  ample  to  protect  him  against  any  ordinary 
vicissitudes  of  the  market.  He  .exercises  the  same  fore- 
sight and  conservatism  as  does  the  merchant  who  places 
a  large  order  for  goods.  The  gambler  in  stocks  is  one 
who  goes  it  " blind,"  buys  and  sells  without  due  study 
of  conditions  or  of  the  property  in  which  he  invests, 
but  trusts  to  chance.  He  often  risks  more  than  he  can 
afford  to  lose,  perhaps  wasting  the  savings  of  many 
months  in  one  transaction.  He  might  as  well  risk  his 
money  on  a  horse-.race  or  a  roulette  table.  Wall  Street 
is  full  of  gamblers  of  this  kind.  "People  deal  in 
chance,"  said  Jay  Gould  to  a  Senate  committee.  "Your 
minister,  doctor,  and  barber  have  all  the  same  interest 
in  speculation." 

Glamor  of  Speculation. — Into  the  Street  crowd  hun- 
dreds of  men  and  women,  drawn  by  the  stories  told  of 
the  enormous  fortunes  made  there,  the  great  sums  cleared 
in  one  deal,  the  big  profits  of  a  single  transaction.  The 
glamor  of  speculation  fascinates  them.  In  the  year  1902 
the  story  of  John  W.  Gates 's  sensational  deal  in  Louis- 
ville and  Nashville  stock,  in  which  he  bought  control  of 
a  great  railroad  in  a  few  days,  served  so  to  excite  the 
gambling  propensities  of  the  country  that  Wall  Street 


66  WORK  OF  WALL  STREET 

was  soon  filled  with  a  crowd  of  outside  speculators. 
Without  training  or  study  or  intelligent  consideration, 
these  outsiders,  or  " lambs,"  as  they  are  often  called, 
stake  their  money  on  the  mere  chance  of  the  rise  and 
fall  of  prices.  In  other  words,  they  bet  on  quotations. 
No  wonder  they  are  generally  all  sheared  in  the  Street. 
"Gamesters  die  poor,"  says  Andrew  Carnegie  in  his 
"Empire  of  Business,"  "and  there  is  certainly  not  an 
instance  of  a  speculator  who  has  lived  a  life  creditable 
to  himself  or  advantageous  to  the  community.  The  man 
who  grasps  the  morning  paper  to  see  first  how  his  specu- 
lative ventures  upon  the  Exchanges  are  likely  to  result, 
unfits  himself  for  the  calm  consideration  and  proper  solu- 
tion of  business  problems."  If  Mr.  Carnegie  had  used 
the  word  "gambler"  in  place  of  the  word  "speculator," 
his  statement  would  have  been  absolutely  correct. 

The  gambling  in  stocks,  however,  is  not  limited  to  the 
class  of  outside  amateurs.  The  Street  has  its  profes- 
sional gamblers  as  well — men  who  know  every  trick  of 
the  desperate  business  in  which  they  are  engaged; 
"plungers"  who  take  enormous  risks  for  the  chance  of 
enormous  gain.  A  very  considerable  proportion  of  the 
business  of  the  Stock  Exchange,  and  practically  all  the 
business  of  the  bucket-shops,  is  pure  gambling. 

Volume  of  Transactions. — The  statistics  of  the  "boom" 
year  of  1901  may  be  studied  to  advantage  by  those  who 
desire  to  obtain  an  idea  of  the  scope  of  speculation  and 
of  some  of  the  laws  which  govern  it.  In  that  year  the 
total  sales  of  listed  and  unlisted  stocks  traded  in  at  the 
Stock  Exchange  represented  a  par  value  of  $25,272,- 
329,200,  which  was  three  times  the  total  par  value  of 
all  the  stocks  admitted  to  dealings  by  the  Exchange — 
a  fact  revealing  the  speculative  character  of  the  trans- 
actions. In  a  single  year  the  entire  supply  of  stocks 
was  sold  three  times  over.  These  stocks  included  many 
that  are  rarely  traded  in  at  all.  In  the  active  stocks 


THE  STOCK-MARKET 


67 


the  speculation  was  much  heavier,  and  there  were  some 
whose  entire  capital  changed  hands  ten  to  twenty  times 
over  in  the  course  of  a  year.  The  following  are  9  stocks 
the  total  number  of  whose  listed  shares  were,  in  1901, 
sold  nearly  fifteen  times  over: 


Total  sales 
shares. 

Number  shares 
listed. 

Times 
sold. 

St.    Paul    

12,700,000 

558  218 

22  J 

Union  Pacific   

22,24(3,000 

1,040,514 

211 

American    Sugar    

8,121,000 

450000 

18 

Rock   Island    

8,195,000 

599  019 

134 

Manhattan     

0,080,000 

480,000 

12* 

Wabash    (preferred)     .  .  . 
Atchison     

3,009,000 
12,177,000 

240,000 
1,020  000 

124 
Hi 

Brooklyn  Rapid  Transit. 
Erie     

5,302,000 
11,185,000 

450,000 
1,123,470 

Hi 

10 

m«*«i 

on  f\ot  nnr* 

K  r\r>-t  oo-i 

1  A  K 

This  means  not  only  speculation,  but  overspeculation. 
Such  a  market  could  hardly  be  termed  healthy,  and  it 
is  not  surprising  that  at  the  height  of  the  speculation 
the  severe  convulsion  of  May  9  occurred.  Nine  days 
earlier,  on  April  30,  the  total  sales  of  the  day  were 
3,270.884  shares,  of  which  2,150,517  were  of  nine  stocks, 

as  follows: 

Number  of 
shares  listed. 
5,084,780 
1,123,470 
1,020,000 
5,102,773 
1,040,514 


Total  sales. 

United  States  Steel   489,444 

Erie     309,800 

Atchison     247,450 

United  States  Steel   v preferred) 220.140 

Union  Pacific   200,353 


Southern  Pacific   151,800  1,978,321 

Atchison    (preferred)     141,530  1,141,995 

Northern  Pacific    94.300  1,550,000 

New  York  Central   89,700  .        1,150,000 

Overspeculation. — Thus,  in  one  day,  about  one-eighth 
of  the  entire  capital  stock  of  9  great  companies  were 
sold  in  the  Stock  Exchange.  On  April  24,  1901,  662,000 
shares  of  Union  Pacific — two-thirds  of  its  entire  issue — 


68  WORK  OF  WALL  STREET 

were  sold.  On  April  15,  1902,  877,000  of  the  total 
1,200,000  shares  issued  of  Southern  Railway  were  traded 
in.  On  one  day  in  February,  1893,  there  were  957,955 
shares  ($50)  of  Reading  sold.  A  great  "turn  over"  of 
sales  is  of  course  necessary  in  the  process  of  distributing 
securities  among  investors  after  they  leave  the  hands  of 
the  manufacturer.  A  bushel  of  wheat  or  a  quarter  of 
beef  or  a  yard  of  cloth  is  sold  several  times  before  it 
reaches  the  consumer.  So  the  large  sales  on  the  Ex- 
changes are,  in  the  main,  in  accordance  with  a  natural 
economic  law. 

It  is  true  in  a  sense  as  Bacon  said  many  years  ago, 
"As  for  the  chopping  of  bargains,  when  a  man  buys  not 
to  hold  but  to  sell  over  again,  that  commonly  grindeth 
double,  both  upon  the  seller  and  upon  the  buyer."  But 
this  is  one  of  the  necessary  evils  of  the  whole  system 
of  transportation,  and  it  is  compensated  for  by  the  bene- 
fits conferred.  The  same  thing  is  true  of  the  process 
of  transporting  goods  from  one  place  to  another.  It 
involves  a  tax  which  "grindeth  double"  both  upon  the 
shipper  and  the  consumer,  but  the  transportation  bene- 
fits both.  Speculation  is  in  one  of  its  aspects  the  trans- 
portation of  securities  from  producer  to  consumer.  But 
when  it  is  said  that  in  1910  about  225,000,000  shares  of 
stock  valued  at  $20,000,000,000*  were  sold  on  the  five 
principal  Stock  Exchanges  of  the  United  States,  the 
question  may  fairly  be  asked  whether  a  considerable 
proportion  of  this  total  did  not  represent  overspeculation 
which  is  waste,  the  evil  of  which  must  be  charged  off 
the  value  of  speculation  properly  conducted. 

It  is  only  within  a  recent  period  that  the  volume  of 
stock  transactions  has  been  studied  with  a  view  of  as- 
certaining what,  if  anything,  they  reveal  of  the  real 
conditions  underlying  the  stock-market.  Most  people 
imagine  that  the  daily  total  of  sales  shows  only  the 

*  Estimate  of  Professor  Jacob  H.  Hollander. 


THE  STOCK-MARKET 


69 


degree  of  the  market's  activity.  Sometimes  the  sales 
do  not  even  do  that,  for  it  sometimes  happens  that  pro- 
fessional manipulation  swells  the  total  of  sales  when 
the  market  actually  is  dull.  Some  years  ago  commission 
houses  were  complaining  of  a  lack  of  business  when  the 
daily  sales  averaged  600,000  shares.  As  a  matter  of  fact, 
however,  the  record  of  sales  intelligently  studied  proves 
one  of  the  most  important  indices  to  the  actual  condi- 
tions of  the  market.  One  of  the  oldest  and  largest  bank- 
ing-houses in  "Wall  Street  keeps  a  careful  record  of  total 
sales  as  one  of  its  guides  to  its  judgment  of  the  course 
of  the  market.  Taking  the  sales  of  20  active  railroad 
stocks  as  the  basis  of  its  calculations,  it  has  for  twelve 
years  divided  the  record  of  these  sales  into  two  columns, 
one  giving  the  total  transactions  when  prices  were  ad- 
vancing, and  the  other  the  sales  when  prices  were  de- 
clining. The  following  table,  prepared  by  this  house, 
shows  the  millions  of  shares  of  20  active  railroad  stocks 
dealt  in  in  the  bull  and  bear  periods  of  each  year: 

SALES 


MILLIONS  OF  SHAKES. 

EXCESS. 

Bull  periods. 

Bear  periods. 

Bull. 

Bear. 

1890  

24 
26 
38 
17 
16 
32 
21 
47 
49 
116 
114 
170 

15 
24 
48 
51 
23 
30 
30 
22 
47 
88 
43 
72 

9 
2 

'2 

25 
2 
28 
71 
98 

io 

34 

7 

'9 

1891  

1892  

1893  

1894  

1895  

1896  

1897  

1898  

1899  

1900  

1901  

70  WORK  OF  WALL  STREET 

An  examination  of  this  table  shows  that  in  the  ten 
years  from  1890  to  1899,  inclusive,  the  number  of  shares 
dealt  in  in  the  bull  periods  was  only  8,000.000  more  than 
the  number  sold  in  the  bear  periods.  In  other  words, 
every  share  bought  in  those  ten  years  was  sold  again, 
excepting  8,000,000,  the  total  transactions  of  the  20 
stocks  having  been  764,000,000  shares.  It  is  a  fair  in- 
ference that  the  8,000,000  went  into  the  hands  of  perma- 
nent investors.  The  remaining  756,000,000  shares  repre- 
sented the  speculative  business.  In  the  panic  year  of 
1893  the  sales  in  the  declining  market  were  34,000,000 
shares  in  excess  of  the  sales  in  the  bull  periods.  In 
the  boom  years  of  1900  and  1901  the  excess  of  shares 
traded  in  in  the  bull  periods  over  those  sold  in  the  bear 
periods  was  169,000,000.  In  the  preceding  ten  years, 
as  has  been  seen,  the  bull  and  bear  periods  nearly  bal- 
anced each  other,  but  here,  in  two  years,  a  tremendous 
excess  appears  on  the  bull  side.  The  inference  drawn 
from  this  was,  that  an  immense  number  of  shares  had 
been  bought  for  sale,  but  were  still  held  awaiting  a 
favorable  opportunity  for  realization  of  profits  or  pos- 
sibly a  time  of  forced  liquidation.  This  inference  later 
developments  proved  to  be  correct. 

During  the  year  1901  the  sales  of  stocks  averaged  up- 
wards of  900,000  shares  a  day  except  on  Saturdays,  when 
the  Exchange  is  open  only  for  two  hours.  There  were 
several  Saturdays,  however,  in  which  the  two  hours' 
business  aggregated  more  than  1,000,000  shares. 

Taking  for  illustration  900,000  shares  a  day  as  a  basis 
of  calculation,  it  is  roughly  estimated  that  300,000  shares 
represent  manipulation,  300,000  the  transactions  of  the 
room  traders,  and  300,000  the  actual  buying  and  selling 
by  pools  and  public.  This  estimate,  of  course,  is  merely 
an  estimate  of  average  conditions,  and  it  has  been  criti- 
cised on  the  ground  that  it  exaggerates  the  volume  of 


THE  STOCK-MARKET  71 

manipulative  transactions,  and  under-estimates  those  of 
bonafide  business.  There  are  days  when  manipulation 
represents  nearly  all  of  the  dealings.  There  are  other 
days  when  the  room  traders  constitute  nearly  the  entire 
market.  There  are  days  in  which  the  public  is  pre- 
dominant. 

Number  of  Operators. — Taking  one  month  with  an- 
other, and  one  year  with  another,  there  is  probably  an 
average  of  60,000  persons  in  the  stock-market  all  the 
time.  In  periods  of  activity  there  are  doubtless  many 
more,  in  periods  of  dullness  and  uncertainty  many  less, 
but  the  market  can,  as  a  rule,  depend  upon  this  support 
for  its  speculative  business.  It  does  not  follow  that  the 
same  60,000  persons  are  in  the  market  all  the  time. 
"Wall  Street  is  like  a  hotel.  New  guests  are  constantly 
arriving  and  others  leaving.  Sometimes  every  room  is 
occupied  and  cots  have  to  be  placed  in  the  halls,  so  great 
is  the  crush.  At  other  times  half  the  house  is  empty. 
This  estimate  applies  only  to  the  New  York  Stock  Ex- 
change and  its  customers.  To  the  60,000  individuals  who 
constitute  its  market,  must  be  added  the  many  patrons 
of  the  Consolidated  Stock  Exchange.  To  the  number 
should  also  be  added  the  small  speculators  who  frequent 
the  offices  of  the  irregular  and  bogus  brokers,  and  who 
may  be  likened  to  the  camp-followers  of  a  great  army. 
The  New  York  Stock  Exchange,  however,  makes  the 
market  for  stocks.  Its  prices  govern  the  outside  specu- 
lation as  absolutely  as  they  do  that  within  its  own  walls ; 
and  while  the  outside  speculation  is  of  a  very  consider- 
able, though  unknown,  volume,  in  speaking  of  the 
"stock-market"  the  reference  is  always  to  the  business 
of  the  Stock  Exchange. 

"Bulls"  and  "Bears."— The  market  is  divided  into 
two  main  divisions:  one,  the  bulls,  representing  those 
who  buy  stocks  in  the  expectation  that  they  can  sell  at 
7 


72  WORK  OF  WALL  STREET 

higher  prices;  and  the  other,  bears,  or  those  who  sell 
stocks  in  the  expectation  that  they  can  buy  them  later 
at  lower  prices.  A  bull  who  has  bought  is  "long"  of  the 
market;  a  bear  who  has  sold  is  "short"  of  the  market. 
A  "long"  who  sells  at  higher  prices  is  said  to  have 
realized  his  profits,  or  if  he  sells  at  a  loss  is  said  to  have 
liquidated.  In  case  the  sale  is  the  result  of  an  exhausted 
margin  or  the  calling  of  loans,  it  is  forced  liquidation. 
A  "short"  who  buys  stocks  is  said  to  have  "covered," 
and  this  term  applies  whether  he  has  bought  at  a  profit 
or  a  loss.  "When  too  many  persons  have  bought  stocks 
the  "long"  interest  becomes  too  heavy  for  the  market 
to  carry,  and  it  is  generally  comparatively  easy  for  the 
bears,  by  selling  short,  to  depress  prices  and  force  the 
"longs"  to  sell,  when  the  "shorts"  can  cover  at  a  profit. 
This  operation  is  generally  called  "a  bear  raid."  On  the 
other  hand,  when  the  "short"  interest  becomes  too  large 
it  is  generally  easy  for  the  bulls  to  advance  prices,  thus 
forcing  the  "shorts"  to  cover.  A  "short"  interest  is 
often  an  element  of  strength  to  the  market  because  it 
creates  a  demand  for  stocks  to  cover. 

Professionals  and  Public. — There  are  two  other  divi- 
sions in  the  market,  the  professionals  and  the  public. 
The  professionals  are  those  who  make  a  business  of 
speculation.  The  public  is  a  class  of  individuals  who, 
engaged  in  trade  or  commerce,  appear  in  the  Street  as 
occasional  speculators. 

In  a  newspaper  of  August  3,  1835,  appeared  this  inter- 
esting item: 

New  Orleans,  Kentucky,  Tennessee,  and  Ohio  stocks  sell  at  high 
prices.  Merchants  bring  parcels  of  these  stocks  across  the  moun- 
tains. They  are  better  than  bills  of  exchange.  A  great  many 
merchants  in  the  streets  around  Wall  Street  now  dip  privately 
In  stock  speculation.  Many  of  the  officers  of  the  banks  and  in- 
surance companies  do  the  same  thing.  This  is  the  cause  of  the 


THE  STOCK-MARKET  73 

great  increase  of  stock  speculation.  Pearl  Street  is  nearly  im- 
passable by  reason  of  the  quantity  of  boxes  on  the  sidewalks. 
So  in  Wall  Street  by  the  groups  of  brokers. 

This  is  an  early  picture  of  the  public  in  the  stock- 
market.  To-day,  as  nearly  seventy  years  ago,  merchants 
dip  not  only  privately,  but  openly  in  speculation;  while 
not  only  New  Orleans,  Ohio,  and  Tennessee  are  repre- 
sented in  the  market,,  but  Chicago — a  city  then  unknown 
— and  the  great  far  West,  reaching  even  to  the  Pacific. 
For  the  stock-market  is  thoroughly  national  in  its  scope. 

A  stock-market  that  has  no  " public"  is  in  a  most  un- 
satisfactory condition.  Professionals  can  and  do  buy 
and  sell  among  themselves,  but  this  is  a  process  not  un- 
like the  "swapping"  of  horses  between  regular  horse 
traders.  The  public  supplies  the  new  interest  in  the 
Street,  the  fresh  demand,  the  increased  capital. 

The  professional  is  a  class  that  includes  many  different 
kinds  and  degrees  of  operators.  The  banking-house  car- 
rying 150,000  and  more  shares  and  the  curbstone  specu- 
lator who  buys  10  and  20  shares  may  both  be,  in  the 
true  sense,  professionals.  They  are  both,  one  in  a  whole- 
sale and  the  other  in  a  retail  way,  engaged  in  the  busi- 
ness of  discounting  the  future.  Both  make  a  study  of 
values  and  make  a  profit,  large  or  small,  by  their  intel- 
ligence in  correctly  reading  the  signs  of  the  times.  They 
are  the  skilled  workmen  of  the  Street,  and  they  consti- 
tute a  highly  trained  body  of  experts  in  stock  values 
and  market  prices.  In  their  way  they  display  as  much 
ability  as  the  scientist,  the  artist,  and  the  artisan.  In 
this  class  of  professionals  are  many  skilled  in  manipula- 
tion. In  this  class  also  must  be  placed  the  room  traders, 
or  those  members  of  the  Exchange  who  do  business 
only  for  their  own  account  and  who  become  skilled  in 
knowing  how  to  take  quick  advantage  of  the  ever-mov- 
ing prices  in  the  board-room.  To  the  professional, 


74  WORK  OF  WALL  STREET 

speculation  is  like  a  game  of  chess ;  and  a  man  like  James 
R.  Keene  often  played  it  with  the  skill  of  a  Lasker, 
calling  ' '  mate  in  twelve  moves ' '  before  his  opponent  even 
realized  that  he  was  in  difficulty. 

Insiders. — There  is  still  another  class  of  speculators 
who  are  called  "insiders."  They  are  directors  or  offi- 
cials of  corporations  or  in  other  positions  where  it  is 
possible  to  obtain  inside  information  as  to  the  business 
of  the  companies  whose  stocks  are  traded  in  in  Wall 
Street.  They  know  things  in  advance  of  the  public  or 
even  the  professionals.  They  are  able  to  speculate  on 
the  vantage-ground  of  certain  knowledge,  but  even  in- 
siders sometimes  slip  in  their  operations.  There  have 
been  speculative  directors  who,  selling  the  stock  of  their 
own  company  short,  have  found  themselves  cornered. 
It  is  an  adage  in  the  Street,  that  there  is  no  easier  way 
to  lose  money  than  to  bet  on  a  "sure  thing." 

Railroads  and  Industrials. — There  are  438  different 
stocks  admitted  to  dealings  in  the  Stock  Exchange,  but 
rarely  as  many  as  200  of  these  are  actually  traded  in  on 
any  one  day.  About  150  stocks  constitute  an  average 
day's  market.  Stocks  actually  traded  in  are  called  ac- 
tive; those  not  traded  in  are  inactive.  A  stock  may  be 
active  to-day  and  inactive  to-morrow,  and  the  reverse. 
There  are  two  main  divisions  in  the  stock-list,  namely, 
railroad  stocks  and  industrials.  There  are  several  sub- 
divisions in  each  of  these  two  classes.  The  railroad 
stocks  are  divided  into  groups  representing  systems. 
For  instance,  there  are  the  trunk-line  group,  represent- 
ing the  Pennsylvania,  the  New  York  Central,  the  Erie, 
the  Lackawanna,  and  the  Baltimore  &  Ohio;  the  coalers, 
including  the  Reading,  the  Jersey  Central,  the  Lehigh 
Valley,  the  Delaware  &  Hudson  and  the  Lackawanna, 
which  are  carriers  and  miners  of  anthracite  coal;  the 
Grangers,  which  include  the  St.  Paul,  the  Northwestern, 


THE  STOCK-MARKET  75 

the  Burlington,  the  Rock  Island,  and  other  lines  in  the 
grain-producing  section  of  the  country;. and  the  trans- 
continental stocks,  comprising  the  Union  Pacific,  the 
Southern  Pacific,  the  Western  Pacific,  the  Atchison,  the 
Northern  Pacific,  and  the  Great  Northern,  which  are 
lines  stretching  from  the  Middle  West  to  the  Pacific. 
The  traction  stocks  are  those  of  the  leading  street-rail- 
way systems.  The  industrials  are  divided  into'  groups 
representing  manufacturing,  mercantile,  oil,  gas,  elec- 
tric, and  other  companies.  Both  classes  of  stocks  are 
further  subdivided  into  groups  representing  ownership. 
For  instance,  there  is  the  great  Morgan  group  com- 
prising railroads,  industrials  and  banks;  the  Standard 
Oil  or  Rockefeller  group,  also  of  railroads,  industrials 
and  banks;  the  group  long  identified  with  the  Gould  es- 
tate, the  Vanderbilt  group,  the  Union  Pacific,  formerly 
the  Harriman  group,  the  group  formerly  controlled  by 
Edwin  Hawley,  the  Hill  group  and  others. 

It  is  important  to  keep  these  different  classes  and 
groups  in  mind  in  order  to  understand  Wall  Street,  for 
the  stock-market  is  a  collection  of  many  small  markets, 
each  distinct  from  the  other  and  subject  to  special  influ- 
ences, and  yet  bound  to  the  others  by  certain  great 
forces.  There  are  days  when  the  entire  list  rises  or  falls, 
swayed  by  some  irresistible  influence  which  controls  the 
movements  of  prices  without  distinction  of  classes  or 
groups  or  names.  On  other  days,  however,  the  different 
groups  move  independently  of  each  other.  For  instance, 
if  the  banks  are  discriminating  in  loans  against  unlisted 
stocks,  these  may  be  very  weak  while  the  rest  of  the 
stocks  may  be  strong.  At  other  times  the  industrials 
advance,  while  the  railroad  stocks,  perhaps  because  of 
a  war  of  rates  or  some  adverse  legislation,  may  decline. 
Bad  crop  news,  which  would  depress  the  Grangers,  might 
not  have  any  effect  on  the  transcontinental  stocks.  A 


76  WORK  OF  WALL  STREET 

strike  of  miners  would  hurt  the  coalers,  but  might  not 
affect  the  Grangers.  There  is,  however,  a  strange  thing 
in  the  market  which  is  called  "sympathy,"  and  it  some- 
times happens  that  one  stock  or  group  of  stocks  will 
have  a  sympathetic  effect  upon  another,  although  there 
is  no  close  connection  between  them.  The  market,  as 
a  whole,  taking  one  month  with  another,  reflects  the 
average  industrial  and  agricultural  conditions  of  the 
country;  and  it  is  thus  true  that  ""Wall  Street  is  the  ac- 
cepted mirror  and  barometer  of  all  American  business. ' '  * 

*  F.  W.  Hirst,  Editor  of  the  London  Economist. 


CHAPTER  VI 

INVESTMENT,  SPECULATION  AND  GAMBLING* 

So  fundamental  to  a  right  comprehension  of  the  func- 
tion of  the  stock-market  is  an  understanding  of  the  dis- 
tinctions between  investment,  speculation  and  gambling 
that  a  further  and  more  detailed  statement  is  needful. 
The  Hughes  Commission  put  a  discussion  of  these  dis- 
tinctions into  the  very  beginning  of  its  report  on  the 
Stock  Exchange,  and  rightly  so,  because  the  existence 
of  the  Wall  Street  system  depends  upon  a  correct  con- 
ception of  these  differences,  for,  if  speculation  is  im- 
moral, it  should,  if  possible,  be  prevented. 

During  a  visit  at  the  house  of  a  relative  in  Pasadena, 
the  author  became  acquainted  with  his  next  door  neigh- 
bor, a  man  who  had ,  spent  his  life  in  the  far  Western 
country.  One  day  he  came  to  the  writer,  with  a  tri- 
umphant smile  on  his  face,  and  a  bottle  in  his  hand.  He 
poured  out  a  little  of  the  contents  of  the  bottle  that  I 
might  see  it.  "Look,"  he  said,  "it  is  petroleum  from  my 
oil  well." 

He  then  proceeded  to  tell  how  he  and  two  friends 
had  prospected  for  oil  in  Southern  California,  and  finally 
put  $26,000  in  purchasing  the  territory  and  boring  a 
well.  "It  was  a  gamble,"  he  said.  "We  bet  $26,000 
that  there  was  oil  in  the  well  we  located.  We  have  won 
the  bet." 

He  was  mistaken;  it  wasn't  a  gamble.  It  was  a  specu- 
lation at  least  so  far  as  this  man  was  concerned.  For 
he  understood  the  oil  business,  and  being  familiar  with 

*  A  part  of  this  chapter  is  taken  from  an  address  delivered  by 
the  author  before  the  Episcopal  Church  Congress  of  the  United 
States,  held  in  Boston  in  1909. 

77 


78  WORK  OF  WALL  STREET 

the  characteristics  of  oil  territory,  he  had  not  risked  his 
money  until  he  had  gone  over  the  ground  thoroughly, 
noted  every  feature,  made  measurements  and  tests,  and 
finally  located  the  place  for  a  well  with  a  judgment 
which  the  results  proved  to  have  been  sound.  He  took 
risks,  indeed,  large  risks.  His  use  of  his  money  was 
not  an  investment,  as  it  would  have  been  if  he  had  bought 
a  known  producing  property.  It  was  a  speculation.  He 
did  not  know  that  there  was  oil  there.  But  he  had  faith 
that  there  was  oil  and  acted  on  that  faith. 

Definitions. — An  investment  is  an  operation  based  on 
eight  or  knowledge. 

A  speculation  is  an  operation  based  on  faith. 

A  gamble  is  an  operation  based  on  chance. 

One  writer  declares  that  investment  is  a  science  and 
speculation  is  an  art.  But  both  are  equally  science  and 
art. 

Suppose,  however,  that  this  Pasadena  man  had  been 
without  the  experience  necessary  to  take  intelligent 
risks.  Suppose  he  had  bought  a  prospect  blindly  with- 
out consideration,  investigation,  study.  He  might  have 
"struck  oil,"  but  it  would  have  been  a  gamble  quite  as 
much  as  if  he  had  bet  his  money  on  the  turn  of  a  card. 
Suppose  now  that  this  oil  operator  should  form  a  com- 
pany to  take  over  the  oil  well  tliat  he  has  discovered, 
and  should  issue  a  prospectus  offering  the  stock  for 
sale.  Suppose  that  this  prospectus  gets  into  Eastern 
capitalists'  hands,  and  attracted  by  the  prospect  of  ten, 
twenty  or  forty  per  cent,  profits,  one  of  them  thinks  of 
buying  some  of  the  stock.  What  does  he  know  about  oil 
wells  in  general  or  that  oil  well  in  particular?  He  is 
3,000  miles  away,  and  proposes  to  bet  his  money  merely 
on  what  a  stock  circular  says.  That  would  be  simply 
gambling.  A  California  miner  once  said  that  no  one 
had  any  business  to  put  his  money  into  mines  except 


INVESTMENT,  SPECULATION  AND  GAMBLING  79 

.the  professional  miner  who  knew  the  business,  or  else  a 
rich  man  who  could  afford  to  lose  his  money.  Every- 
body else  who  invested  in  mines  was  essentially  a  gam- 
bler. 

It  is  not  too  much  to  say  that  there  is  more  gambling 
by  honest  but  misguided  folks,  who  put  their  money 
into  projects  that  they  know  nothing  about,  than  there 
is  in  the  margined  operations  of  the  New  York  Stock 
Exchange,  the  bulk  of  whose  business  is  done  by  men 
who  have  at  least  some  understanding  of  the  art  of  tak- 
ing large  risks  intelligently. 

Now  suppose  this  Pasadena  oil  man  in  capitalizing  his 
oil  well  for  the  stock  company  should  issue  and  sell 
at  par  $1,000,000  stock  for  property  worth  $100,000.  In 
such  a  case  he  would  be  a  crook,  a  thief,  quite  as  much 
as  the  professional  card  player  who  plays  with  marked 
cards.  He  could  not  be  strictly  called  a  gambler,  for 
he  would  be  putting  his  money  on  "a  sure  thing."  But 
he  would  be  a  thief,  quite  as  much  as  if  he  held  up  a 
man  at  the  point  of  a  pistol  and  stole  the  .contents  of 
his  pockets.  And  any  newspaper  which  printed  the  pro- 
moter's lying  prospectus  as  a  paid  advertisement,  having 
a  pretty  shrewd  idea  of  its  true  character,  would  be  his 
partner  in  a  criminal  transaction. 

It  is  unfortunate  that  the  words  "investment," 
"speculation,"  and  "gambling"  should  be  used  so 
loosely,  without  a  clear  conception  of  the  difference  be- 
tween them.  One  is  often  employed  in  place  of  the  oth- 
ers. Many  a  beautifully  printed  prospectus  speaks  of 
a  project  as  an  "investment"  when  it  is  nothing  else 
than  a  gamble,  while  the  word  "speculation"  has, 
through  long  and  constant  misuse,  acquired  a  popular 
odium  which  does  not  rightly  belong  to  it. 

If  we  restore  the  true  meanings,  we  shall  promote 
sound  thinking  on  some  important  subjects.  Even  the 


80  WORK  OF  WALL  STREET 

report  of  the  Governor  Hughes  Commission,  admirable 
as  it  is,  in  most  respects,  is  not  altogether  clear  in  the 
distinctions  it  makes  between  investment  and  gambling. 
"While  it  shows  conclusively  the  economic  advantages  of 
speculation,  it  reveals  some  confusion  of  thought  which 
is  liable  to  do  harm  in  befogging  the  issues  at  stake. 
In  saying  that  speculation  may  be  wholly  legitimate, 
or  pure  gambling  or  in  partaking  of  the  qualities  of 
both,  the  report  is  far  less  accurate  than  in  declaring 
that  a  distinction  exists  between  speculation  which  is 
carried  on  by  persons  of  means  based  on  intelligent  fore- 
cast and  that  which  is  carried  on  by  persons  without 
these  qualifications.  Speculation  is  never  gambling, 
though  the  machinery,  which  is  created  to  facilitate  the 
operations  of  speculation,  may  be  used  by  gamblers. 

Confining  ourselves  to  the  business  of  the  Stock  Ex- 
change, investment  is  the  purchase  of  securities  to  keep 
for  income.  In  making  such  a  purchase  safety  is  the 
primary  consideration,  the  amount  of  the  income  is  im- 
portant but  secondary.  "What  the  investor  is  really  do- 
ing is  buying  an  income,  but  it  is  of  the  first  importance 
to  him  that  the  income  should  be  safe.  In  investment, 
therefore,  risk  is  reduced  to  a  minimum. 

Stock  speculation  is  the  purchase  of  securities,  usually 
on  margin  but  sometimes  outright  for  cash,  with  the 
object  of  selling  again  at  a  higher  price,  or  else  of  selling 
the  securities  at  one  price  with  the  object  of  buying 
them  in  later  at  a  lower  price.  Income  and  safety  are 
essentials  in  investment;  risk  and  profit  in  speculation. 
To  secure  profit  the  speculator  is  willing  to  take  larger 
risks  than  the  investor,  so  that  speculation  implies  in* 
telligent  risk.  Gambling  is  blind  chance.  All  three  op- 
erations can  be  carried  on  by  the  machinery  of  the  mar- 
ket, and  it  is  difficult  to  distinguish  between  them,  but 
they  should  not  be  confounded,  one  for  the  others.  They 


INVESTMENT,  SPECULATION  AND  GAMBLING  81 

are  three  different  things.  The  market  should  by  its 
rules  strive  to  reduce  gambling  to  the  smallest  possible 
proportions,  but  to  destroy  the  opportunities  for  specu- 
lation in  order  to  prevent  gambling  would  be  like  killing 
a  man  in  order  to  get  rid  of  a  wart  on  his  nose.  These 
definitions  are  substantially  confirmed  by  no  less  an 
authority  than  Thomas  F.  "Woodlock.  Quoting  C.  M. 
Bergstresser  as  saying  that  speculation  begins  and  gam- 
bling ceases,  when  foresight  enters,  Mr.  Woodlock  goes 
on  to  show  that  the  true  distinction  between  stock  specu- 
lation and  gambling  lies  not  in  the  act  performed,  but 
in  the  state  of  mind  *  of  the  man  performing  it.  "What 
he  means  is  this:  Three  men  buy  1,000  shares  of  Penn- 
sylvania stock.  A  buys  for  investment  intending  to  keep 
for  the  income  from  dividends.  B  after  intelligent  study 
of  railroad,  market  and  general  business  conditions,  buys 
the  stock  in  order  to  be  able  to  sell  later  at  a  higher 
price,  just  as  a  merchant  may  buy  a  million  yards  of 
cotton  sheeting  with  the  intention  of  selling  later  at  a 
profit.  Both  may  or  may  not  employ  their  credit  in 
making  the  purchase,  but  the  operation  is  a  speculation. 
C  buys  the  stock  blindly.  He  simple  bets  that  the  price 
will  advance.  In  A's  case  the  risk  is  small;  in  B's  ease 
the  risk  is  large  but  intelligent;  in  C's  case  the  transac- 
tion is  all  ftsk,  mere  blind  chance. 

Same  Machinery  for  All. — Now  all  three  of  these 
operations  are  ^conducted,  as  has  been  stated,  by  pre- 
cisely the  same  market  machinery,  and  to  the  observer 
they  may  appear  exactly  the  same.  "What  complicates 
the  problem  of  separating  the  good  from  the  bad  is  the 

*  The  same  thing  is  said  by  President  Hadley :  "The  difference 
between  legitimate  speculation  and  gambling  lies  neither  in  the 
subject  matter  nor  in  the  form  of  the  transaction,  but  in  the  intent 
and  purpose.  Legitimate  speculation  involves  anticipation  of  the 
needs  of  the  market  and  power  to  assume  risks  in  making  contracts 
to  meet  these  risks." 


WORK  OF  WALL  STREET 

fact  that  the  man,  who  may  think  he  is  investing  and 
honestly  intends  to  do  so,  may,  through  ignorance  and 
folly,  be  employing  his  money  in  a  gamble;  while  the 
professional  speculator  may,  by  the  exercise  of  intelli- 
gent foresight,  be  more  truly  a  conservative  and  con- 
structive force  in  the  community  than  the  foolish  in- 
vestor. The  outright  purchase  of  $10,000  bonds  by  an 
ignorant  investor  may,  under  certain  conditions,  be  more 
truly  a  gamble  than  the  purchase  of  1,000  shares  of 
common  stock  on  10  per  cent,  margin  by  a  shrewd  specu- 
lator. 

The  question  therefore  presents  itself:  Is  it  worth 
while  to  enact  laws  to  prevent  speculation  in  order  to 
make  gambling  impossible?  If  it  is  not  worth  while  to 
do  that,  is  it  possible  by  new  rules  and  regulations  to 
destroy  the  opportunities  for  stock  gambling  while  pre- 
serving the  opportunities  for  speculation?  What  has  al- 
ready been  said  shows  how  difficult  is  the  problem  of 
separating  the  two  without  destroying  both.  The 
Hughes  Commission  met  this  difficulty  in  its  study  of  the 
subject.  "The  problem,"  it  says  in  its  report, 
"wherever  speculation  is  deeply  rooted  is  to  eliminate 
that  which  is  wasteful  and  morally  destructive  while  re- 
taining and  allowing  free  play  to  that  which  is  bene- 
ficial. The  difficulty  in  the  solution  of  the  problem  lies 
in  the  practical  impossibility  of  distinguishing  what  is 
virtually  gambling  from  legitimate  speculation." 

The  Commission  in  dealing  with  this  difficult  problem 
acted  on  the  principle  that  Exchanges  can  accomplish 
more  than  legislatures;  in  other  words  that  regulation 
of  the  market  by  the  Exchanges  is  to  be  preferred  to 
regulation  by  the  government,  and  this  is  the  judgment 
of  all  who  have  studied  the  subject  deeply.  The  Hughes 
Commission  recommended  a  number  of  changes  in  the 
Stock  Exchange  system,  nearly  all  of  which  have  been 


INVESTMENT,  SPECULATION  AND  GAMBLING  8 

substantially  adopted  by  that  institution.  But  even  with 
these  changes  it  is  still  possible  to  gamble  in  stocks, 
and  even  if  the  Exchange  were  abolished,  the  gambling 
would  continue  and  be  even  worse  than  under  the  pres- 
ent system  of  a  regulated  market.  Yet  there  are  a  num- 
ber of  publicists  who  propose  to  enact  laws  intended 
to  make  speculation  in  stocks  impossible,  unmindful  of 
the  disastrous  consequences  of  such  a  policy.  The  re- 
sults of  governmental  interference  with  the  operations 
of  a  free  market  were  clearly  shown  by  the  experience 
of  Germany,  which,  after  several  years  of  attempted 
regulation  of  speculation  to  an  extent  that  amounted 
to  practical  prohibition,  has  recently  been  obliged  to 
reverse  its  policy  which  resulted  in  driving  away  busi- 
ness that  was  beneficial  without  preventing  secret  and 
demoralizing  gambling  operations. 

Interference  With  Economic  Law. — All  attempts  un- 
duly to  interfere  with  economic  law  result  in  disaster. 

The  Supreme  Court  of  the  United  States  in  the  cele- 
brated Board  of  Trade  case  (opinion  rendered  by  Justice 
Holmes)  declared: 

The  plaintiff's  chamber  of  commerce  is,  in  the  first  place,  a 
great  market,  where,  through  its  eighteen  hundred  members,  is 
transacted  a  large  part  of  the  grain  and  provision  business  of 
the  world.  Of  course,  in  a  modern  market  contracts  are  not 
confined  to  sales  for  immediate  delivery.  People  will  endeavor 
to  forecast  the  future  and  to  make  agreements  according  to 
their  prophecy.  Speculation  of  this  kind  by  competent  men  is 
the  self-adjustment  of  society  to  the  probable.  Its  value  is 
well  known  as  a  means  of  avoiding  or  mitigating  catastrophes, 
equalizing  prices  and  providing  for  periods  of  want.  It  is  true 
that  the  success  of  the  strong  induces  imitation  by  the  weak, 
and  that  incompetent  persons  bring  themselves  to  ruin  by  un- 
dertaking to  speculate  in  their  turn.  But  legislatures  and  courts 
generally  have  recognized  that  the  natural  evolutions  of  a  com- 
plex society  are  to  be  touched  only  with  a  very  cautious  hand, 
and  that  such  coarse  attempts  at  a  remedy  for  the  waste  in- 


4  WORK  OF  WALL  STREET 

cident  to  every  social  function  as  a  simple  prohibition  and  laws 
to  stop  its  being  are  harmful  and  vain.  This  court  has  upheld 
sales  of  stock  for  future  delivery  and  the  substitution  of  parties 
provided  for  by  the  rules  of  the  Chicago  Stock  Exchange.  Clews 
v.  Jamieson,  182  U.  S.,  461. 

A  Civil  War  Illustration. — It  is  recorded  that  the  one 
time  Abraham  Lincoln  used  strong  language  in  the 
"White  House  was  when  Governor  Curtin  referred  to  the 
Wall  Street  gambling  in  gold  during  the  awful  crisis 
of  the  Civil  War.  "Curtin,"  said  Lincoln,  "what  do 
you  think  of  those  fellows  in  Wall  Street  who  are  gam- 
bling in  gold  at  such  a  time  as  this?  For  my  part,  I 
wish  every  one  of  them  had  his  devilish  head  shot  off." 

Even  as  Lincoln  spoke,  the  Government  began  to  use 
its  power  to  prevent  this  gambling  in  gold  and  a  law 
was  enacted  having  that  end  in  view.  It  remained  on 
the  statute  books,  however,  only  a  few  days.  Why? 

Because  the  attempt  to  regulate  or  limit  the  market 
by  governmental  action  only  made  matters  worse.  Gold 
quickly  advanced  from  198  to  250,  and  instead  of  the 
evil  being  done  away  with,  it  was  actually  aggravated. 
Moreover,  bad  as  the  gambling  in  gold  was,  the  market 
transactions — even  the  speculations — in  gold  were  bene- 
ficial to  the  country;  and  the  establishment  of  the  Ex- 
change where  the  transactions  in  gold  were  carried  on, 
and  which  for  a  number  of  years  virtually  controlled 
the  business  of  the  country,  was  an  economic  necessity. 
More  than  that,  countless  people  at  that  time  were 
obliged  to  sell  gold  "short,"  that  is,  to  sell  something 
they  did  not  own,  intending  to  cover  in  the  future,  in 
order  to  protect  themselves  in  their  mercantile  opera- 
tions; and  instead  of  selling  short  under  these  condi- 
tions being  a  wicked  and  gambling  process,  it  was  de- 
scribed as  being  absolutely  essential  to  the  conduct  of 
legitimate  business;  and  Horace  White  declares  that  not 


INVESTMENT,  SPECULATION  AND  GAMBLING  85 

to  have  sold  "short"  at  that  time  would  have  been  to 
make  all  business  a  gamble.  In  other  words,  by  using 
the  speculative  market,  merchants  saved  themselves 
from  greater  speculative  risks  in  their  own  trades. 
That,  in  fact,  seems  to  be  one  of  the  uses  of  the  specu- 
lative exchanges,  namely,  that  they  make  the  legiti- 
mate operations  of  life  less  hazardous  and,  therefore, 
less  of  a  gamble. 

Mr.  White  is  confirmed  by  President  Hadley  of  Yale 
University,  who  says  in  the  "Cyclopedia  of  Political 
Science:" 

The  law,  under  the  pressure  of  public  sentiment,  was  obeyed; 
but  its  results  were  the  very  reverse  of  what  the  public  had 
anticipated.  The  event  proved  that  gold  speculation  had  been 
the  means  of  steadying  the  market;  without  it  gold  rose  100  per 
cent,  in  two  weeks,  and  then  dropped  50  per  cent,  at  the  hurried 
repeal  of  the  prohibition. 

Short  Selling. — This  incident  is  a  good  illustration 
of  the  value  of  short  selling  which  is  not  always  either 
immoral  or  injurious.  What  on  its  face  may  look  like 
the  depreciation  of  other  persons'  property  may,  and 
often  is,  an  act  of  the  highest  conservatism.  If  there 
had  been  no  "shorts"  to  cover  in  the  panic  of  1907, 
the  whole  market  would  have  completely  collapsed,  and 
the  entire  business  of  the  country  would  have  suffered  ir- 
reparable injury.  Speaking  of  short  sales  Judge  Bar- 
nard, of  the  Circuit  Court  of  the  District  of  Columbia, 
said  in  rendering  judgment  in  a  Stock  Exchange  case : 

A  short  sale  is  not  a  gambling  operation.  The  law  defines  a 
gambling  operation  to  be  one  where  the  parties  make  a  contract 
of  purchase  and  sale  without  intent  on  the  part  of  either  to  de- 
liver or  receive  the  article  which  is  the  subject  of  the  contract. 
Nothing  passes  between  the  parties  beyond  the  money  from  loser 
to  winner,  and  nothing  else  was  intended  to  pass.  This  is  a  mere 
bet — a  gamble.  But  where  actual  delivery  is  made  of  the  goods 


86  WORK  OF  WALL  STREET 

contracted  to  be  sold  and  received  the  transaction  becomes  a  com- 
mercial one.  The  testimony  shows  that  in  a  short  sale  delivery 
of  the  stocks  sold  is  made,  and  the  purchase  price  paid.  That 
fact  establishes  it  as  a  commercial  transaction.  It  may  be  specu- 
lative; it  is  speculative;  but  commercial  transactions  generally 
are  more  or  less  speculative,  the  speculative  element  in  them 
varying  mainly  in  degree. 

The  Two  Sides  of  Speculation. — We  have  in  the  inci- 
dent related  of  Lincoln's  administration  clearly  set  be- 
fore us  the  two  sides  of  this  question  of  Wall  Street 
speculation. 

One  side  is  plain  enough.  When  we  see  the  gamblers 
gambling  on  the  hazards  of  the  nation;  when  we  see 
them  swindling  innocent  investors  by  false  prospectuses, 
deceitful  advertising  and  manipulative  schemes;  when 
we  see  the  market-place  converted  into  a  Monte  Carlo, 
in  which  stalks  the  grinning  skeleton  of  dishonor,  moral 
degradation  and  suicide;  when  we  see  the  gambling 
mania  spread  over  a  nation,  making  sober  industry  seem 
mean  and  contemptible  and  creating  a  morally  un- 
healthy and  economically  unsound  hunger  and  thirst 
after  riches  rapidly  attained  and  a  luxury  that  corrupts 
the  foundations  of  civilization;  when  we  see  that  out 
of  these  conditions  spring  the  tempest  and  fury  and 
awful  collapse  of  panic  with  its  resultant  misery  and 
poverty;  when  we  see  all  these  things,  we  are  tempted 
to  exclaim  with  Lincoln,  "I  wish  that  every  devilish 
head  of  them  could  be  shot  off;"  and  we  can  in  part 
realize  the  feelings  of  Christ  when  He  whipped  the 
money-changers  out  of  the  temple. 

If  this  were  all  of  Wall  Street,  then,  wipe  it  out. 
But  there  is  something  more  in  Wall  Street  than  gam- 
bling. Every  economic  writer  recognizes  the  fact  that 
speculation  is  inherent  in  all  commerce  and  is  an  indis- 
pensable part  of  the  modern  organization  of  business. 


INVESTMENT,  SPECULATION  AND  GAMBLING  87 

The  essence  of  speculation  is  risk,  and  risk  is  inherent 
in  all  commercial  and  credit  transactions.  If  the  taking 
of  risks  is  immoral,  then  all  trade  is  wicked.  That  in 
fact  was  once  the  universal  belief.  President  Hadley 
says  that  to  the  mediaeval  economist,  the  merchant  was 
a  licensed  robber,  while  the  modern  economist  sees  in 
him  a  public  benefactor. 

Value  of  Speculators. — The  difference  between  specu- 
lators and  other  men  engaged  in  business  is  not  that 
the  former  take  risks  and  that  the  latter  take  no  risks, 
but  that  the  speculators  assume  larger  risks ;  and  the 
more  risks  the  speculators  take  the  less  are  the  risks 
of  the  ordinary  processes  of  commerce.  In  this  fact 
is  to  be  found  one  of  the  important  uses  of  the  specu- 
lative market.  "In  so  far,"  says  Professor  Emery  of 
Yale,  one  of  the  foremost  authorities  on  this  subject, 
"as  we  do  away  with  business  speculation,  we  make  all 
business,  whether  in  the  purchase  of  commodities  or 
the  investment  of  capital,  more  speculative  than  it  would 
otherwise  be." 

The  facts  in  the  case  are  simply,  but  clearly,  stated 
by  Hadley,  who  says: 

Every  right-minded  person  must  deplore  the  extent  to  which 
speculation  is  carried  at  the  present  day.  But  side  by  side  with 
the  wrong  side  of  speculation,  which  does  much  harm,  there  is 
a  right  kind  of  speculation  which  seems  to  be  an  absolute  neces- 
sity for  the  successful  and  regular  conduct  of  modern  industrial 
life. 

Balance  Wheel. — Speculation  is  a  part  of  the  great 
system  of  distribution  to  which  credit  and  transporta- 
tion belong — it  performs  in  its  way  the  same  service 
for  the  world  that  credit  and  transportation  do.  It  fa- 
cilitates the  process  of  distributing  products  to  con- 
sumers. Henry  George  likened  speculation  to  a  balance 


88  WORK  OF  WALL  STREET 

wheel,  by  which  the  whole  machinery  of  industry  is  reg- 
ulated. 

"We  have  three  or  four  basic  facts  to  base  our  opinion 
and  policy  upon: 

1.  Speculation  in  its  proper  use  is  indispensable  and 
beneficial  to  mankind. 

2.  The  organization  of  speculation  can  be  and  is  sub- 
ject to  gross  misuses,  the  effects  of  which  are  evil,  de- 
moralizing   and    sometimes    assume    the    proportion    of 
national  disaster. 

3.  Attempts  to  regulate  speculation  by  governmental 
action   have    invariably    resulted   in    doing   more    harm 
than  good. 

Thirty  years  ago  Henry  Ward  Beecher  was  asked  by 
a  New  York  Legislative  Committee  what  was  his  opin- 
ion of  the  moral  effect  of  a  speculative  transaction. 
The  answer  he  gave  is  the  only  answer  that  we  can  give. 

"When  it  is  done  properly,"  he  said,  "I  think  well 
of  it ;  when  it  is  done  poorly,  I  think  poorly  of  it. ' ' 

The  question  is  whether  it  is  better  to  suffer  the  dis- 
aster which  the  destruction  of  the  machinery  of  specu- 
lation would  entail  in  order  to  get  rid  of  the  evil  in- 
cident to  speculation,  or  to  maintain  the  system  in  spite 
of  the  evil  in  order  to  obtain  the  economic  benefits  of 
speculation. 

There  is  nothing  immoral  or  uneconomic  in  the  taking 
of  risks.  If  it  had  not  been  for  men  willing  and  able 
to  take  great  risks  it  would  have  taken  a  thousand 
years  to  have  brought  about  the  development  of  this 
continent  which  has  been  the  achievement  of  only  four 
centuries.  But  because  risk  is  beneficent,  that  is  no 
excuse  for  taking  gambling  risks,  for  modern  experience 
demonstrates  that  gambling  is  not  only  wasteful,  but 
demoralizing.  But  it  is  a  justification  for  intelligent 
speculation;  and  every  step  one  taeks,  every  change  one 


INVESTMENT,  SPECULATION  AND  GAMBLING  89 

makes,  every  operation  of  business,  large  and  small,  is 
necessarily  a  speculation.  Moreover,  there  is  nothing 
wrong  in  speculation  by  the  use  of  credit,  for  nearly 
all  of  the  transactions  of  modern  business  are  based  on 
credit,  as  has  already  been  indicated.  But  while  stock 
speculation  performs  a  large  work,  the  beneficence  of 
which  is  recognized  by  every  leading  economist,  that  is 
no  reason  why  everybody  may  engage  in  it.  The  stock- 
market  is  frequently  crowded  with  people  who  have  no 
business  in  it. 

People  Who  Should  not  Speculate. — Let  us  mention 
several  classes  of  persons  who  should  not  enter  into 
stock  speculation: 

1.  Women.     More    and    more    women    are    entering 
into  business  and  some  of  them  display  a  high  order  of 
business    ability.     Moreover,    every    woman    should    be 
taught  something  of  the  proper  use  of  money  in  inves- 
ment.     But  women  as  a  class  should  keep  out  of  specu- 
lation.    There  may  be,  perhaps,  half  a  dozen  of  them 
whose  experience  and  ability  and  means  justify  them  in 
speculating  in  stocks,  but  they  are  the  exceptions.     The 
first    essential   of   a   woman's   investment   of   money   is 
safety.     That  comes  first,  and  there  is  no  second. 

2.  All  persons    of   limited   capital   and  income.     Be- 
cause a  person  has  saved  $1,000,  and  that  is  10  per  cent, 
margin  for  the  purchase  of  100  shares  of  stock,  that 
is  no  justification  for  the  speculative  purchase  of  such 
securities.     The    vast    majority    of    wage    earners,    high 
and  low,  have  not  the  time,  the  knowledge  or  the  finan- 
cial ability,  for  stock  speculation,  and  this  applies  also 
to  many  professional  men  and  especially  to  clergymen, 
doctors    and    journalists.     A    man    who    is    continually 
watching  the  stock  tape  has  little  time  left  to  watch 
his    employers'    or    clients'    business.     The    journalist, 
and  especially  the  financial  journalist,  should  keep  out 


90  WORK  OF  WALL  STREET 

of  margin  speculation,  for  the  very  obvious  reason  that 
such  operations  are  apt  to  warp  his  judgment  and  color 
his  writings.  The  financial  writer  who  is  in  the  stock- 
market  is  no  longer  a  disinterested,  unprejudiced  ob- 
server of  the  stock-market.  The  merchant  who  is  in 
business  for  himself  is  fitted  for  speculation  in  stocks, 
but  even  he  should  be  careful  not  to  divide  his  interests 
by  his  stock-market  operations  so  far  as  to  weaken  his 
own  legitimate  business. 

3.  All  trustees  and  custodians  of  other  people's 
money  should  keep  out  of  the  stock-market.  Specu- 
lating with  other  people's  money  is  one  of  the  most 
dangerous  temptations  of  modern  times. 

REFERENCES 
"Investment  and  Speculation,"  Thomas  Conway,  Jr.,  and  Albert 

W.  Atwood,  1911. 

"The  Theory  of  Stock  Speculation,"  Arthur  Crump,  1901. 
"Stocks  and   the   Stock-Market,"  Annals  of  American  Academy, 

May,  1910. 

"A  Plain  Guide  to  Investment  and  Finance,"  T.  E.  Young,  1908. 
"Relation  of  Speculation  to  Business,"  Collin  Armstrong,  1908. 
"Investments,  What  and  When  to  Buy,"  R.  W.  Babson,  1908. 
"Speculation  a  Science,"  George  McL.  Irvin. 
"Legislation  against   Speculation  and  Gambling,"  T.   H.   Dewey, 

1905. 
"Speculation  on  Stock  and  Produce  Exchanges,"  Henry  C.  Emery, 

1904. 
"Ten  Years'  Regulation  of  Stock  Exchanges  in  Germany,"  Henry 

C.  Emery,  1908. 

"Economics"  (Chapter  IV),  Arthur  Twining  Hadley. 
"Speculation  in  Relation  to  World's  Prosperity,"  M.  T.  England, 

1897-1902. 

"Cycles  of  Speculation,"  Thomas  Gibson,  1907. 
"Pitfalls  of  Speculation,"  Thomas  Gibson,  1909. 
"Wall  Street  Speculation,"  Keyes,  1904. 
"The  A.  B.  C.  of  Stock  Speculation,"  S.  A.  Nelson,  1904. 
"Safe  Methods  in  Stock  Speculation,"  Wm.  Y.  Stafford,  1902. 
"Success  in  Speculation,"  1888. 


CHAPTER  VII 
VALUES  AND  PRICES 

Every  reader  of  the  financial  page  of  a  daily  news- 
paper— and  there  is  no  other  page  more  frequently  con- 
sulted— is  familiar  with  the  table  of  figures  a  column 
long,  headed  "Sales  at  the  New  York  Stock  Exchange" 
or  "Quotations  for  Stocks."  This  table  is  generally 
presented  as  follows : 

Sales  Net 

Shares              Stocks  Opening  High  Low  Close  Changes 

32,610  Amalgamated  Copper  .  62          64  62  64  -fSJ 

21,200  Lehigh  Valley 179J  179f  178£  179i 

40,100  Reading    151J  151|  150$  151f  +1 

11,100  Third   Avenue    12f  12f  9f  9£  -2f 

31,800  Union  Pacific    173£  174&  173&  174  -flf. 

90,300  United  States  Steel  ...  63          63|  63  63|  +1J 

This  is  an  abbreviation  of  one  day's  quotation  list. 
The  first  column  gives  the  number  of  shares  sold;  the 
second  the  name  of  the  stock ;  and  then  follow  the  open- 
ing, highest,  lowest,  and  closing  prices  of  the  day.  The 
last  column  shows  the  net  change  for  the  day,  namely, 
the  difference  between  the  closing  prices  of  to-day  and 
yesterday.  The  plus  sign  signifies  an  advance ;  the 
minus  sign,  a  decline;  no  sign,  that  the  price  remains 
the  same.  For  instance,  on  this  day,  32,610  shares  of 
Amalgamated  Copper  were  sold.  Its  opening  price  was 
$62.00  a  share;  its  highest  price  was  $64.00;  its  lowest, 
$62.00;  its  closing,  $64.00.  This  closing  price  was  three 
dollars,  twelve  and  one-half  cents  a  share  higher  than 
the  closing  price  of  the  day  preceding.  Now,  it  does 
not  follow  that  because  only  four  prices  are  quoted  in 

91 


p-2  WORK  OF  WALL  STREET 

this  list  that  there  were  only  four  prices  during  the 
day.  On  the  contrary,  there  were  possibly  a  hundred 
different  transactions  in  this  stock,  and  thus  a  hundred 
prices.  Every  sale  made  during  the  day  is  recorded  by 
the  stock-indicator,  or  ticker,  but  most  papers  give  only 
a  summary,  showing  the  opening,  highest,  lowest  and 
closing  prices. 

Phenomena  of  Price  Changes. — To  an  outsider  the 
phenomena  of  sudden  changes  in  prices,  even  in  one 
day,  seem  an  insoluble  mystery;  and  even  the  Wall 
Street  expert  is  often  puzzled  to  account  for  the  fre- 
quent and  wide  divergence  of  prices  and  values.  Why, 
it  may  be  asked,  should  such  a  stock  as  Reading  sell  as 
high  as  151 J  and  as  low  as  150J  in  one  day?  Surely, 
the  difference  of  1J  in  price  could  scarcely  represent 
any  corresponding  change  in  the  earning  power  of  the 
road.  Frequently  prices  fluctuate  far  more  widely  than 
that.  A  difference  of  $10  and  even  $25  a  share  may  oc- 
cur in  the  price  of  a  stock  in  two  or  three  hours.  In  the 
spring  of  1902,  American  Power  broke  from  198  to  120 
in  one  day,  and  in  the  Northern  Pacific  corner  the  com- 
mon stock  of  that  railroad  advanced  several  hundred 
points  to  1,000.  How  wide  the  fluctuations  may  be  in 
the  course  of  a  year  is  indicated  in  the  following  selec- 
tion from  the  quotation  list  of  1910,  giving  the  price 
changes  of  two  industrials  and  four  railroad  stocks: 

1910  High  Low. 

Amalgamated  Copper  90f  55J 

Atchison    124J  90f 

St.   Paul    158|.  113| 

Reading    174*  130| 

Union  Pacific 204J  152J 

United  States  Steel  91  61J 

Even  a  superficial  observer  realizes  the  absolute  in- 
consistency that  often  exists  between  values  and  prices. 
Logically,  the  price  of  a  stock  ought  to  be  identical  with 


VALUES  AND  PRICES  93 

its  true  value.  In  fact,  the  two  are  often  widely  separ- 
ated. A  dividend-paying  standard  stock  of  interna- 
tional reputation  like  St.  Paul  sells  at  one  hundred  dif- 
ferent prices  in  the  course  of  a  day  or  week,  and  in  the 
course  of  a  year,  as  has  been  seen,  the  difference  be- 
tween the  highest  and  lowest  prices,  may  be  $50  a  share, 
Is  there  an  adequate  explanation  of  this  mystery?  We 
are  now  face  to  face  with  one  of  the  fundamental  prob- 
lems of  the  stock-market. 

This  .  difference  between  intrinsic  values  and  market 
prices  is,  however,  by  no  means  confined  to  Wall  Street, 
although  it  is  more  strikingly  exhibited  there.  A  man 
owns  a  house  from  which  he  derives  a  net  income  of 
$1,000.  The  house  is  worth,  say,  $20,000,  and  the  in- 
come of  $1,000  is  5  per  cent,  on  the  investment.  But  if 
he  had  to  sell  the  house  quickly  he  might  not  find  a 
ready  purchaser,  and  would  have  to  sacrifice  the  prop- 
erty, say,  for  $10,000.  There  has  been  no  change  in  the 
actual  worth  of  the  house.  It  is  in  as  good  a  condition 
as  before,  and  the  income  continues,  but  the  price  is 
50  per  cent,  of  the  true  value.  Or  the  owner  of  the 
property  may  find  that  a  corporation  wants  it  for  some 
important  purpose,  and  is  willing  to  pay  a  big  price  for 
immediate  possession.  In  this  case  an  urgent  demand 
has  advanced  the  price,  although  there  has  been  no 
change  in  income.  Let  us  carry  the  illustration  further. 
Suppose  the  corporation  wants  the  property,  but  wants 
it  cheap,  and  is  willing  to  wait  a  while  for  it.  There- 
upon it  begins  to  manipulate  the  market  for  real  estate 
in  that  vicinity,  and  by  various  expedients  impresses  the 
owner  with  the  belief  that  the  prices  of  property  on  the 
street  are  likely  to  decline,  and  that  he  had  better  sell 
for  what  he  can  get  now  than  wait  and  perhaps  do 
worse.  There  has  been  no  change  in  value  as  measured 
by  income,  but  manipulation  has  changed  the  price. 


04  WORK  OF  WALL  STREET 

Apply  all  this  to  stocks,  and  an  idea  is  formed  of  the 
conditions  that  produce  the  often  startling  differences 
between  values  and  prices. 

If  prices  always  represented  value  it  would  seem  as 
if  stocks  paying  4  per  cent,  dividends  would  sell  prac- 
tically at  the  same  prices;  those  paying  5  per  cent,  at 
higher  prices,  and  so  on.  That  this  is  not  always  the  rule 
is  shown  by  the  following  table,  giving  the  yearly  divi- 
dends in  1911,  and  the  highest  prices  of  that  year  of  a 
number  of  well  known  stocks: 

1911  Highest  Price 

Dividends 

Amalgamated  Copper  2  71f 

Western    Union    3  84$ 

American  Smelting 4  83J 

Consolidated  Gas    4f  148 

United   States  Steel    5  82J 

New  York  Central   5i  115$ 

Baltimore  &  Ohio   6  109| 

Pennsylvania   6  130J 

Reading    6  161J 

Southern   Pacific    6  1261. 

American  Sugar  7  122$ 

Canadian   Pacific    7  247 

Louisville   &   Nashville    7  160f 

Northern  Pacific  7  137J 

General  Electric  8  168$ 

Pullman    8  163 

New  Jersey  Central  8  320 

N.  Y.,  N.  H.,  &  Hartford   8  151J 

Union   Pacific    10  192f. 

Missouri   Pacific    None  63 

Difficult  to  Reconcile. — It  is  not  easy  to  reconcile  these 
differences.  Here  we  have  a  non-dividend  payer  selling 
for  nearly  as  much  as  a  two  per  cent,  dividend  stock, 
a  ten  per  cent,  stock  selling  for  less  than  a  seven  per 
cent,  stock,  one  eight  per  cent,  stock  selling  at  320  and 
another  for  163,  almost  one-half  as  much.  It  seems  evi- 
dent, however,  that  prices,  while  controlled  by  intrinsic 
value  up  to  a  certain  point,  are  subject  also  to  certain 
laws  that  do  not  affect  values  in  the  least. 


VALUES  AND  PRICES  95 

What  constitutes  value?  In  the  case  of  a  bond  its 
value  is  measured: 

1.  By  its  rate  of  interest. 

2.  By  the  date  of  its  maturity. 

3.  By  the  nature  of  the  security  pledged  for  the  pay- 
ment of  the  principal. 

4.  By  its  marketability. 

5.  By  the  supply  of  money  seeking  investment. 
In  the  case  of  a  common  stock  value  is  measured : 

1.  By  the  dividend  it  pays. 

2.  By  the  net  income  of  the  company  after  payment 
of  fixed  charges  and  operating  expenses,  all  such  net 
income  belonging  to  the  stock. 

3.  By  the  character  of  the  management,  on  which  in 
large  measure  depends  the  continuance  of  dividend  pay- 
ments. 

What  makes  the  price  ?  By  price,  of  course,  is  meant 
the  sum  of  money  for  which  a  stock  or  bond  is  sold  in 
the  market.  Price,  strictly  speaking,  should  be  value 
expressed  in  dollars,  and  quotations  are  prices  as  re- 
corded on  the  tape  or  in  the  market  report.  The  chief 
influences  that  make  prices  are: 

1.  Intrinsic  value. 

2.  Current  news,  which  may  not  affect  real  values 
in  the  least,  but  which  Wall  Street  thinks  may  enhance 
or  injure  values. 

3.  The  condition  of  the  market  machinery  for  specu- 
lation.    For  instance,   stringency  in  the   money-market 
may  not  affect  the  earning  power  of  a  company  in  the 
least,  but  may  temporarily  affect  the  market  price  of 
its  stock. 

4.  Manipulation,   or   the   fine   art   of   making  prices 
what  the  manipulators  want  them  to  be,  independent  of 
what  they  ought  to  be. 


96  WORK  OF  WALL  STREET 

5.  The  market  supply  of  the  stock  for  speculative 
purposes. 

Wall  Street  is  always  striving  to  discount  the  future, 
and  much  of  the  mystery  that  surrounds  this  question 
of  price  is  cleared  up  by  keeping  in  mind  the  fact  that 
the  price  represents  what  the  Street  thinks  to-day  will 
be  the  values  of  to-morrow  or  next  month  or  next 
quarter.  Often  prices,  while  at  variance  with  present 
values,  accurately  represent  future  values.  Quite  as 
often  they  do  not. 

In  the  case  of  a  railroad  stock,  its  dividend-paying 
power  depends  upon  the  state  of  trade,  the  size  of  the 
crops,  the  character  of  the  country  through  which  the 
roads  runs,  and  also  in  no  small  degree  upon  the  skill 
and  honesty  of  its  management.  The  rate  of  dividend 
may  therefore  change  greatly  from  year  to  year.  Take 
the  case  of  even  such  a  standard  stock  as  that  of  the 
New  York  Central.  From  1869  to  1884  it  paid  8  per 
cent.,  but  in  1885  it  dropped  to  3£  per  cent.;  from  1886 
to  1889  it  p.aid  4  per  cent.;  the  next  two  years,  4£  per 
cent.;  in  1892,  5|  per  cent.;  the  next  two  years,  5  per 
cent. ;  in  1895,  4£  per  cent. ;  the  next  three  years,  4  per 
cent. ;  in  1899,  4J  per  cent. ;  in  1900  and  1901,  5  per  cent. 
Since  1901,  it  has  fluctuated  between  5  and  6  per  cent., 
reaching  the  latter  rate  in  1907  and  1910,  and  later  de- 
clining. 

Uncertainty  Breeds  Speculation. — It  is  the  uncertainty 
which  attends  the  business  of  the  great  corporations 
that  makes  their  stocks  so  attractive  for  speculative 
purposes  and  their  prices  fluctuate  so  widely.  It  fol- 
lows that  if  two  4-per  cent,  stocks  sell  at  different  prices, 
it  may  be  because,  first,  there  is  a  real  difference  in 
their  prospects  of  future  income,  the  earnings  of  one  for- 
ging ahead  while  those  of  the  other  are  decreasing;  or, 
second,  they  are  subject  to  differing  influences  that  af- 


VALUES  AND  PRICES  97 

feet  prices  and  not  true  values,  for  it  may  happen  that 
two  stocks  of  actual  value  may  sell  at  different  prices 
at  the  same  time. 

The  average  prices  of  the  entire  list  may,  for  a  con- 
siderable period,  vary  greatly  from  the  true  measures 
of  value.  Inasmuch  as  values  depend  on  the  prosperity 
or  the  reverse  of  the  country,  it  ought  to  follow  that 
Wall  Street  prices  should  correspond  to  the  actual  con- 
ditions of  trade.  This  is  always  true  if  the  period  of 
comparison  be  made  long  enough,  but  it  is  not  always 
the  case  for  short  periods,  and  sometimes  not  for  a  year 
at  a  time.  For  one  thing,  the  stock-market  is  often 
ahead  of  the  rest  of  the  country,  inasmuch  as  it  strives 
to  discount  future  conditions,  so  that  an  advance  in 
stock  values  may  precede  a  boom  in  business,  and  prices 
actually  waver  and  decline  by  the  time  the  activity  in 
trade  has  reached  its  height.  In  like  manner  a  stock 
may  decline  on  good  news,  for  the  reason  that  the  good 
news  had  already  been  discounted  by  a  preceding  advance 
in  price. 

Manipulation. — But  another  cause  may  make  one 
stock  or  group  of  stocks,  or  indeed  the  entire 
market,  to  swerve  from  the  line  of  value.  That  cause 
is  manipulation.  There  exists  in  Wall  Street,  as  has 
been  seen,  a  class  of  professional  speculators  who  make 
the  stock-market  their  life  study  and  business.  These 
men  base  their  operations,  or  try  to.  on  values  as  meas- 
ured by  income,  but  they  study  value  so  as  to  be  able 
to  buy  at  less  than  value,  and  then  they  work  to  sell 
at  as  much  more  than  value  as  they  can  get.  They 
employ  every  means  in  their  power  to  make  stocks  at- 
tractive to  investors  and  other  possible  buyers  when 
they  are  long  and  want  to  sell;  or  to  make  the  market 
appear  doubtful  or  dangerous  when  they  are  short  and 
want  to  buy.  It  has  already  been  shown  how  large  a 


98  WORK  OF  WALL  STREET 

part  in  the  market  manipulation  sometimes  plays.  For 
days,  weeks,  and  sometimes  for  months,  prices  may  rep- 
resent transient  influences  more  than  they  do  intrinsic 
value. 

The  Dow  Theory. — Various  attempts  have  been  made 
to  construct  a  scientific  theory  covering  this  whole  sub- 
ject of  values  and  prices.  The  most  satisfactory  of 
these  is  that  evolved  by  Charles  W.  Dow.  His  theory 
is  based  on  the  unmistakably  sound  principle  that,  in 
the  long  run,  prices  are  controlled  by  values.  •  He  dis- 
covers three  distinct  movements  of  prices  in  progress  so 
far  as  common  stocks  are  concerned,  namely: 

Primary. — This  is  governed  by  intrinsic  values,  and 
is  the  most  powerful  of  the  three. 

Secondary,  or,  as  Mr.  Dow  calls  it,  the  "swing." — 
This  is  governed  by  manipulation  and  by  current  events 
temporarily  affecting  actual  values  and  the  market  ma- 
chinery. 

Tertiary. — The  daily  fluctuations. 

Trifling  causes,  a  mere  rumor,  the  operations  of  room 
traders,  may  and  often  do  control  the  price  fluctuations 
of  a  day.  The  concerted  operations  of  great  operators 
may,  and  often  do,  control  the  price  movement  of  weeks 
and  months.  But  the  primary  movement,  that  based  on 
value,  lasts  the  longest,  and  is  ultimately  the  controlling 
factor  in  speculation  as  in  investment. 

The  primary  movement  lasts  generally  from  four  to 
five  years.  Thus,  there  was  the  bull  movement  of  1877 
to  1881,  accompanying  the  resumption  of  specie  pay- 
ments and  ending  in  the  assassination  of  Garfield.  This 
was  followed  by  the  bear  movement  of  1881  to  1885,  in- 
cluding the  panic  of  1884.  Then  there  was  the  bull 
movement  of  1885  to  1889,  when  the  sequence  was 
broken  by  the  Baring  panic  of  1890,  followed  quickly 
by  an  upward  movement  due  to  the  large  harvest  of 


VALUES  AND  PRICES  99 

1891  and  a  currency  inflation.  But  the  regular  sequence 
was  resumed  in  1893,  when  the  panic  set  in,  the  various 
effects  of  which  continued  until  1897.  Then  began  the 
great  McKinley  boom,  based  on  sound  money,  large 
crops,  and  heavy  gold  production,  which  lasted  until  the 
panic  of  1907,  with  two  or  three  interruptions.  Now, 
in  all  of  these  movements  the  ultimate  prices  approached 
very  closely  to  intrinsic  values.  But  in  every  one  of 
them  there  were  long  periods  of  time  when  the  sec- 
ondary movement — or  swing — was  at  work,  and  prices 
varied  greatly  from  values. 

A  bicycle  rider  starts  out  for  a  long  trip  over  a  road 
never  before  traveled  by  him.  The  actual  distance  is 
20  miles,  but  his  cyclometer  at  the  end  registers  30. 
This  is  due  to  the  fact  that  he  has  not  traveled  in  the 
straight  line,  but  has  gone  from  one  side  of  the  road  to 
the  other  in  an  endless  succession  of  curves  in  order  to 
avoid  teams  and  ruts.  Then,  at  one  point  of  the  road 
he  has  missed  his  way,  or  has  been  maliciously  misdi- 
rected, and  thus  went  four  miles  before  he  discovered 
his  mistake  and  turned  back.  In  like  manner  prices 
travel  through  an  endless  succession  of  daily  curves  or 
fluctuations,  and  sometimes  miss  the  road  altogether, 
and,  misled  by  manipulation,  travel  a  long  distance 
astray,  but  in  the  end  they  arrive  at  the  true  destina- 
tion— value. 

Thus,  in  the  McKinley  boom,  the  price  of  stocks,  tak- 
ing the  whole  period  of  the  movement  into  view,  cor- 
responded with  the  actual  gain  in  value,  but  this  ad- 
vance in  prices  was  accompanied  by  remarkable  fluctua- 
tions. The  boom  began  in  August,  1896,  when  Wall 
Street's  fear  of  Bryan's  election  on  a  free-silver  platform 
came  to  an  end,  and  it  reached  its  climax  at  the  time 
of  the  Northern  Pacific  corner  and  panic  of  May  9,  1901. 
During  this  period  of  nearly  five  years  the  lowest  aver- 


100  WORK  OF  WALL  STREET 

age  price  of  20  railroad  stocks  was  less  than  42,  and 
the  highest  average  price  was  nearly  118  on  May  1,  1901, 
a  difference  of  76,  the  percentage  of  advance  being  180. 
This  upward  movement  corresponded  very  closely  to 
every  possible  test  of  value.  For  instance,  bank  clear- 
ings in  New  York  in  this  period  increased  175  per  cent. 

But  in  the  case  of  railroad  stocks  the  best  measure  of 
value,  as  has  already  been  indicated,  is  the  surplus  earn- 
ings after  all  expenses,  taxes,  and  bond  interest  have 
been  paid.  The  rest  belongs  to  the  stock.  A  calcula- 
tion shows  that  the  dividend-producing  capacity  of  all 
the  railroads  of  the  United  States  in  the  period  under 
review  kept  pace  with  this  advance  in  prices.  An  analy- 
sis of  the  Interstate  Commerce  Commission  reports  for 
the  years  ending  June  30,  1896,  and  1900,  shows  that  the 
net  income  applicable  to  dividends  increased  per  mile 
from  $492  to  $1,180.  The  dividends  actually  paid  in- 
creased from  $484  to  $725  per  mile.  Statistics  covering 
exactly  the  period  of  the  stock  boom  would  show  a  still 
greater  rate  of  increase.  These  figures  are  sufficient, 
however,  to  indicate  how,  in  a  period  of  five  years,  the 
line  of  price  held  true  to  the  line  of  value. 

Conditions  of  Success. — The  speculator,  therefore, 
who  studies  most  closely  the  conditions  that  create  real 
value,  and  bases  his  operations  on  what  this  study  of 
values  reveals,  is  most  likely  to  achieve  success.  A 
man  died  several  years  ago  worth  millions  of  dollars 
made  through  operations  in  copper,  coffee,  and  ostrich- 
feathers — a  strange  combination,  truly,  but  his  success 
does  not  appear  strange  when  it  is  known  that  he  and 
his  partners  made  the  most  exhaustive  study  of  these 
three  products,  so  that  there  was  nothing  worth  know- 
ing about  them  that  they  did  not  know.  The  reason 
why  so  many  lose  money  in  Wall  Street  is  that  they 
do  not  base  their  operations  on  values,  but  on  chance 


VALUES  AND  PRICES  101 

or  "tjps,"  and  they  are  swept  out  of  sight  either  by  the 
daily  fluctuations  or  by  the  still  more  enduring  and 
more  powerful  "swings."  The  secondary  and  tertiary 
movements  of  prices  far  more  than  the  primary  are  re- 
sponsible for  the  failures  of  Wall  Street. 

In  this  very  McKinley  boom,  when  as  has  been  seen, 
the  five  years  difference  between  the  lowest  and  the 
highest  prices  was  76  points,  prices  actually  traveled 
over  a  course  of  271  points.  There  were  15  great  move- 
ments and  swings  upward  and  14  swings  downward, 
the  lines  of  prices  continually  doubling  upon  themselves. 
These  swings  were  of  varying  durations.  Some  lasted 
only  for  days,  and  some  for  months.  The  period  be- 
tween April,  1899,  and  July,  1900,  was  one  of  continu- 
ous advance  in  the  income  capacity  of  the  railroads,  the 
increase  being  from  $875  per  mile  in  the  fiscal  year  of 
1899  to  $1,180  in  the  fiscal  year  of  1900;  and  yet  this 
was  in  the  main  a  period  of  falling  prices. 

For  more  than  a  year,  therefore,  the  line  of  price 
separated  from  the  line  of  value.  Overproduction  of  in- 
dustrial securities,  the  sudden  death  of  Ex-Governor 
Flower,  then  the  bull  leader,  and  the  opening  of  the 
Boer  War,  involving  the  closing  of  the  Transvaal  mines, 
and  the  presidential  election,  were  mainly  responsible 
for  this  separation.  But  the  influence  of  value  reas- 
serted itself  as  soon  as  the  Street  recovered  from  the 
chill  of  these  events,  and  prices  soon  regained  all  the 
ground  they  had  lost. 

The  investor  can  afford  to  base  his  operations  entirely 
on  value,  but  the  speculator,  to  achieve  success,  must 
not  only  make  a  deep  study  of  values,  but  also  learn  to 
calculate  upon  the  force  and  duration  of  these  market 
swings.  Even  the  student  of  value  may  make  mistakes, 
for  it  should  not  be  forgotten  that  speculation  is  always 
discounting  the  future,  and  is  trading  on  values  to  be 


102  WORK  OF  WALL  STREET 

established  rather  than  on  values  that  are  already  es- 
tablished. This  accounts  for  the  familiar  phenomenon 
of  a  stock  declining  on  a  piece  of  good  news.  That  is 
because  the  advance  has  preceded  the  good  news — in 
other  words,  discounted  it.  The  insider,  or  the  far- 
sighted  outsider,  has  foreseen  the  favorable  development 
and  bought  in  advance  of  the  news.  Then  when  the 
thing  develops  and  the  news  is  announced  he  sells  to  real- 
ize his  profit,  thus  causing  a  decline. 

Law  of  Averages. — An  analysis  of  the  stock-market  re- 
veals a  mysterious  law  of  averages.  The  great  primary 
movements  based  on  value  run  in  about  equal  periods 
of  boom  and  depression.  One  upward  sweep  is  followed 
by  a  downward  sweep  of  about  equal  length. 

There  have  been  constructed  in  Wall  Street  elaborate 
charts  or  systems  by  which  it  is  claimed  the  course  of 
prices  can  be  infallibly  foretold.  Men  who  use  these 
systems  as  a  substitute  for  close  study  and  sound  judg- 
ment of  conditions  are  as  much  fools  as  the  young  noble- 
man who  some  years  ago  constructed  a  system  for 
"breaking  the  bank"  at  Monte  Carlo,  and  succeeded 
in  only  breaking  himself.  But  not  a  few  houses  of  high 
standing  have  charts  showing  the  course  of  prices 
through  a  series  of  years,  and  use  them  as  the  man  of 
business  uses  statistics.  They  have  the  advantage,  for 
one  thing,  of  showing  at  a  glance  whether  prices  are 
high  or  low  as  compared  with  preceding  periods.  It  has 
been  shown  in  the  preceding  chapter  how  in  the  course 
of  ten  years  the  sales  of  the  bear  periods  have  almost 
balanced  the  sales  in  the  bull  periods.  A  chart  has  been 
made  of  those  ten  years  fashioned  like  a  checkerboard, 
in  which  the  bull  periods  have  been  left  white  and  the 
bear  periods  made  black,  and  it  is  remarkable  that  the 
number  of  months,  almost  the  number  of  weeks,  of  ad- 
vancing prices  equals  the  number  of  months  and  weeks 


VALUES  AND  PRICES  103 

of  declining  prices.  Prices,  therefore,  have  a  tendency 
to  return  to  the  point  whence1  they  started.  In  the 
course  of  a  year  there  is  apt  to  be  two  bull  and  two  bear 
periods,  and  the  two  highest  points  and  the  two  lowest 
points  are  generally  about  six  months  apart. 

"Wall  Street,"  said  Jay  Gould,  "is  like  the  ocean. 
No  one  man  can  control  it.  It  is  full  of  eddies  and  cur- 
rents. The  thing  to  do  is  to  watch  them;  to  exercise 
a  little  common  sense,  and  on  the  wave  of  speculation 
to  come  in  on  top." 

The  Woodlock  Statement. — In  an  address  before  the 
New  York  University  School  of  Commerce,  Accounts 
and  Finance,  Thomas  F.  "Woodlock  said: 

A.  The  general  trend  or  tide  of  prices  is  determined  by  funda- 
mental values. 

B.  This  tide  is  constantly  interrupted  by  eddies  which  are  the 
result  of  conditions  growing  out  of  speculation  and  accidents. 

C.  The  eddies  in  the  tide  are  usually  swifter  than  the  move- 
ment with  the  tide. 

D.  The  eddies   usually  bear  some   suitable   proportion   to   the 
movement  that  has  preceded  them. 

E.  As  a  general   rule  declines  are  accomplished  more  rapidly 
than  advances  (because  most  speculators  operate  as  "bulls"). 

It  is  evident  that  while  the  chapter  of  accidents  is  never  done, 
the  movement  of  prices  is  by  no  means  so  irregular  as  to  be  in- 
capable of  a  certain  amount  of  foresight,  and  that  speculators 
who  bear  the  above  principles  in  mind,  and  operate  on  them,  can- 
not be  accused  of  being  mere  gamblers.  In  other  words,  stock 
speculation  is  not  of  its  nature  wholly  unscientific. 

REFERENCES 

"Influences  Affecting  Security  Prices  and  Values,"  Thomas  Gib- 
son, Annals  of  American  Academy,  May,  1910. 


CHAPTER  VIII 

THE  STOCK  COMPANY 

If  there  were  no  stock  companies  there  would  be  no 
stock-markets.  The  stock-certificate,  representing  as  it 
does  present  or  prospective  income,  is  therefore  the  very 
corner-stone  of  modern  business.*  A  stock  company  is 
an  association  incorporated  under  the  laws  of  some 
State,  or  by  the  direct  act  of  some  legislature,  for  the 
purpose  of  transacting  business.  It  is  composed  of  a 
number  of  persons  who  share  in  its  capital  and  whose 
interests  in  its  profits  are  represented  by  shares  of  stock. 
The  company  gives  each  stockholder  a  certificate  show- 
ing how  many  shares  he  owns. 

Advantages  of  the  Corporation. — In  a  legal  sense  the 
corporation  is  a  person,  with  the  same  powers  that  a  per- 
son possesses  to  act  and  to  sue.  Yet  the  persons  who 
compose  the  corporations  have,  individually,  no  control 
over  it  or  rights  on  the  property  it  may  own.  A  con- 
tract made  with  a  corporation  is  not  made  with  the 
stockholders  individually.  The  corporation,  therefore,  is 
a  person  without  personality.  Hence  the  aphorism  that 
"corporations  have  no  souls." 

Formerly  nearly  all  business  was  conducted  by  in- 
dividuals or  by  firms.  Now,  however,  the  tendency  is  to 
convert  all  lines  of  business  into  stock  corporations.  A 

*  "I  weigh  my  words,  when  I  say  that  in  my  judgment  the  lim- 
ited liability  corporation  is  the  greatest  single  discovery  of  modern 
times,  whether  you  judge  it  by  its  social,  by  its  ethical,  by  its  in- 
dustrial or,  in  the  long  run, — after  we  understand  it  and  know  how 
to  use  it, — by  its  political,  effects.  Even  steam  and  electricity  are 
far  less  important  than  the  limited  liability  corporation,  and  they 
would  be  reduced  to  comparative  impotence  without  it." 

NICHOLAS  MUBBAY  BUTLEB. 
104 


THE  STOCK  COMPANY  105 

company  presents  many  points  of  advantage  over  a  part- 
nership, not  the  least  being  that  it  gives  continuity  to  a 
business.  It  secures  what  is  called  a  perpetual  suc- 
cession. A  partnership  usually  expires  by  limitation  in 
a  certain  number  of  years  or  by  the  death  of  a  partner. 
A  company  goes  on  without  a  break.  It  may  be  difficult 
to  divide  a  business  at  the  expiration  of  a  partnership 
or  at  the  death  of  one  of  the  partners,  but  the  death  of 
a  shareholder  causes  no  interruption  to  the  business  of 
a  company,  and  the  interest  of  the  deceased  is  easily 
transferred  to  his  heirs  or  sold  in  the  market  and  the 
proceeds  divided  among  them.  Moreover,  the  share- 
holders have  the  great  advantage  of  limited  liability. 
That  is  to  say  their  liability  is  no  greater  than  the 
amount  they  put  into  the  enterprise,  or  voluntarily  as- 
sume. 

Another  important  advantage  of  a  company  is  that  it 
provides  a  convenient  method  of  aggregating  capital 
so  as  to  be  able  to  conduct  business  on  a  large  scale. 
A  man  with  $10,000  is  incapable  of  any  extended  en- 
terprise, but  100  men  with  $10,000  each  represented  in 
a  stock  company  give  a  capital  of  $1,000,000.  A  firm 
with  100  partners  would  be  a  monstrosity;  but  a  com- 
pany with  100  or  1,000  stockholders  is  easily  and  ef- 
fectively managed. 

Par  Value. — The  capital  stock  of  the  company  is  di- 
vided into  denominations  of  a  certain  specified  par  value, 
as,  for  instance,  $5,  $10,  $50,  or  $100.  Shares  of  $100 
each  are  the  rule  in  the  companies  represented  in  the 
Stock  Exchange,  although  there  are  notable  exceptions, 
Reading  stock,  for  instance,  being  divided  into  shares  of 
$50  each,  and  there  are  stocks,  like  the  Great  Northern 
Ore  Certificates,  which  have  no  par  value,  but  which  sim- 
ply represent  equal  shares  in  the  property  and  its  profits, 
and  which  are  worth  exactly  what  they  sell  for  in  the 


106  WORK  OF  WALL  STREET 

market.  The  Kailroad  Securities  Commission  appointed 
by  President  Taft  strongly  favored  the  elimination  of 
par  value  as  a  cause  of  confusion  to  investors  and  of 
bad  legislation.  In  its  report,  the  Commission  says: 

We  do  not  believe  that  the  retention  of  the  hundred  dollar 
mark,  or  any  other  dollar  mark,  upon  the  face  of  the  share  of 
stock,  is  of  essential  importance.  We  are  ready  to  recommend 
that  the  law  should  encourage  the  creation  of  companies  whose 
shares  have  no  par  value,  and  permit  existing  companies  to 
change  their  stock  into  shares  without  par  value  whenever  their 
convenience  requires  it.  After  such  conversion  any  new  shares 
could  be  sold  at  such  price  as  was  deemed  desirable  by  the  board 
of  directors,  with  the  requirement  of  publicity  as  to  the  pro- 
ceeds of  the  sale  of  such  shares  and  as  to  the  disposition  thereof : 
giving  to  the  old  shareholders,  except  in  some  cases  of  reorganiza- 
tion or  consolidation,  prior  rights  to  subscribe  pro  rata,  if  they 
so  desired,  in  proportion  to  the  amount  of  their  holdings. 

As  between  the  two  alternatives  of  permitting  the  issue  of 
stock  below  par,  or  authorizing  the  creation  of  shares  without 
par  value,  the  latter  seems  to  this  Commission  the  preferable  one. 
It  is  true  that  it  will  be  less  easy  to  introduce  than  the  other, 
because  it  is  less  in  accord  with  existing  business  habits  and 
usages;  but  it  has  the  cardinal  merit  of  accuracy.  It  makes  no 
claims  that  the  share  thus  issued  is  anything  more  than  a  par- 
ticipation certificate. 

This  same  suggestion  was  made  years  ago  by  the  emi- 
nent corporation  lawyer  and  publicist,  Edward  M.  Shep- 
ard,  but  the  official  endorsement  of  President  Taft's 
Commission  gives  it  increased  force. 

The  Promoter. — In  the  formation  of  a  new  company, 
the  "promoter"  comes  first.  Many  imagine  the  pro- 
moter to  be  a  recent  development  of  Wall  Street.  He 
has,  indeed,  enjoyed  special  prominence  in  the  last  few 
years,  because  of  the  immense  number  of  new  companies 
organized,  but  he  has  existed  in  one  form  or  another  for 
centuries. 


THE  STOCK  COMPANY  107 

Of  course,  the  history  of  no  two  companies  is  exactly 
the  same.  But  if  a  great  industrial  company  is  pro- 
posed, the  promoter  may,  in  general,  be  said  to  follow 
one  of  two  lines  of  procedure.  He  may  interest  the  dif- 
ferent manufacturers  in  a  certain  line  of  trade  and  in- 
duce them  to  combine,  and  if  successful  in  forming  a 
combination,  he  may  be  rewarded  with  a  large  interest 
in  the  new  company.  Or,  being  satisfied  that  such  a 
combination  would  be  profitable,  he  may  obtain  options 
for  the  purchase  of  the  different  plants.  An  option  is 
the  payment  of  a  certain  sum  of  money  for  the  right  to 
buy  a  plant  or  business,  or  any  other  thing  of  value, 
within  a  specified  time  and  at  a  specified  figure.  If  the 
option  is  not  used  within  the  time  limit  the  promoter 
loses  the  sum  he  paid  for  it. 

The  Underwriter. — Whatever  line  of  procedure  is 
adopted,  the  next  step  is  to  secure  the  backing  of  sorno 
banking-house,  the  larger  and  more  influential  the  bet- 
ter. The  banker  looks  into  the  scheme  carefully,  and 
with  the  aid  of  experts  and  accountants  examines  the 
different  plants,  surveys  the  proposed  field  of  operations, 
and  ascertains  the  present  and  prospective  demand  for 
the  product  to  be  marketed.  If  satisfied  that  the  scheme 
is  a  feasible  one,  the  banker  undertakes  to  underwrite 
it — in  other  words,  to  supply  the  money  necessary  to 
effect  the  combination,  organize  the  company,  and  to 
market  the  securities. 

The  Corporation  Lawyer. — At  this  stage  the  corpora- 
tion lawyer  is  called  in.  He  attends  to  all  the  legal  mat- 
ters involved  in  the  transaction,  advises  as  to 
the  State  the  company  should  be.  incorporated  in, 
draws  up  the  necessary  papers,  and  sees  that  no 
laws  are  violated  and  that  every  legal  require- 
ment is  observed.  The  plan  of  the  company  has 
probably  been  laid  out  by  the  promoter,  and  is 


108  WORK  OF  WALL  STREET 

now  adopted  as  amended  by  the  banker  and  his 
lawyer.  The  amount  of  capital  is  determined,  and  the 
division  of  capital  into  stocks  and  bonds  is  fixed  upon. 

The  Syndicate. — Then  comes  the  underwriting  syndi- 
cate. The  banker  may  be  unable  or  unwilling  to  pro- 
vide all  the  immediate  cash  required  and  assume  all  the 
risk,  so  he  calls  in  other  bankers  and  capitalists  and  a 
syndicate  is  formed.  The  company  having  been  incor- 
porated, it  is  likely  that  after  the  persons  originally 
concerned  in  its  organization  have  taken  a  proportion 
of  the  stock,  a  considerable  amount,  and  perhaps  nearly 
all,  remains  to  be  sold  to  the  public.  The  banker,  if 
his  reputation  is  high  and  his  connections  wide,  is 
usually  able  to  attend  to  this.  His  indorsement  may 
commend  the  securities  to  investors.  But  sometimes  the 
services  of  a  stock-market  manipulator  are  required  in 
order  to  prepare  the  market  to  absorb  the  new  supply 
of  stocks  and  bonds.  In  order  to  market  these,  it  is 
necessary  to  have  them  listed  in  the  Stock  Exchange. 
Before  this  can  be  done  they  are  probably  traded  in  on 
the  curb.  The  new  securities  now  get  into  the  hands 
of  the  broker,  pass  through  the  Stock  Clearing-House, 
are  hypothecated  for  loans  at  the  banks,  and  finally 
reach  the  investor,  who  locks  them  up  in  his  safe-deposit 
vault  and  waits  for  the  interest  and  dividends. 

The  progress  of  a  certificate  of  stock  from  the  pro- 
ducer to  the  consumer,  from  the  organizer  to  the  in- 
vestor, may  be  summed  up  as  follows: 

1.  The  promoter. 

2.  The  banker. 

3.  The  corporation  lawyer. 

4.  The  underwriting  syndicate. 

5.  The  incorporation. 

6.  Issue  of  stock  certificates. 

7.  The  stock-market  manipulator. 


THE  STOCK  COMPANY  109 

8.  The  curb  market. 

9.  Listed  on  the  Stock  Exchange. 

10.  The  stock-broker. 

11.  Hypothecated  for  loans  at  the  bank. 

12.  The  investor. 

In  the  case  of  railroad,  gas,  or  other  companies  re- 
quiring public  franchises  other  steps  have  to  be  taken. 
To  build  a  railroad,  the  sanction  of  commissions, 
courts,  and  legislatures  must  be  obtained. 

Before  1892  the  majority  of  companies  were  incorpo- 
rated in  New  York,  but  for  many  years  New  Jersey  in- 
corporated more  big  corporations  than  any  other  State.* 
Nearly  one-half  of  all  the  large  industrial  companies 
represented  in  the  Stock  Exchange  have  New  Jersey 
charters,  including  the  greatest  corporation  ever  formed, 
namely,  the  United  States  Steel  Corporation,  with  a  capi- 
tal of  $1,018,000,000  stock  and  $300,000,000  of  bonds. 
The  Northern  Securities  Company,  with  $400,000,000 
capital  stock,  controlling  other  companies  having  $642,- 
000,000  of  outstanding  bonds,  was  also  a  New  Jersey 
corporation,  but  was  declared  a  violation  of  the  Sher- 
man anti-trust  law.  The  laws  of  that  State  are  exceed- 
inly  liberal  to  corporations.  The  New  Jersey  company 
is  required  to  maintain  an  office  within  the  State,  this 
office  to  contain  a  stock  transfer  book  and  a  stock  ledger, 
and  to  keep  open  in  business  hours  for  the  transfer  of 
stock;  and  the  annual  meetings  of  stockholders  must 

*  Of  the  262,490  corporations  reporting  in  1910  to  the  Commis- 
sioner of  Internal  Revenue,  New  York  had  31,132,  Pennsylvania 
18,362,  Illinois  17,908,  California  16,088,  Ohio  14,294,  Missouri  11,- 
162,  Massachusetts  8,800,  Wisconsin  8,483,  and  New  Jersey  8,403, 
but  New  Jersey  is  the  home  of  the  big  holding  companies.  William 
J.  Gaynor,  declaring  that  five-sixths  of  the  trusts  were  incorporated 
in  New  Jersey,  argued  that  a  repeal  of  its  law  giving  life  to  hold- 
ing companies,  would  solve  the  trust  problem.  Edward  S.  Meade's 
"Corporation  Finance"  and  John  J.  Sullivan's  "American  Corpora- 
tions" give  adequate  accounts  of  the  sweeping  powers  of  the  New 
Jersey  corporations. 


110  WORK  OF  WALL  STREET 

be  held  there.  But  the  company  may  do  a  business  in 
any  part  of  the  world.  Its  directors  may  have  their 
office  in  Wall  Street,  and  its  factories  may  be  in  Boston 
and  San  Francisco. 

Moreover,  the  articles  of  incorporation,  if  well  drawn 
by  a  competent  lawyer,  can  give  the  company  power  to 
engage  in  almost  every  line  of  business.  It  may  manu- 
facture carpet-tacks,  finance  trusts,  and  operate  rail- 
roads all  at  once.  Moreover,  if  nothing  is  said  to  the 
contrary  in  the  incorporation  papers,  the  company  be- 
comes a  perpetual  corporation. 

If  stock  is  to  be  issued  for  plants  or  other  property, 
the  promoters  can  put  any  value  they  please  upon  the 
property,  and  authorize  the  issue  of  stock  in  payment; 
and  the  State  of  New  Jersey  accepts  this  valuation  with- 
out question.  This  makes  stock  watering  easy.  Only 
three  incorporators  are  needed,  and  two  of  these  may  be 
dummies,  and  the  interest  of  all  three  in  the  concern 
may  not  be  more  than  $1,000.  On  payment  of  an  in- 
corporation fee,  and  with  an  initial  investment  of  only 
$1,000,  three  men  can  in  one  day  incorporate  a  company 
in  New  Jersey  with  powers  to  do  almost  anything  and 
everything  under  the  sun.  It  is  not  surprising  that  New 
Jersey  grew  rich  from  the  incorporation  of  big  com- 
panies, and  especially  the  so-called  "holding"  com- 
panies.* 

The  Trust. — James  B.  Dill,  the  well-known  lawyer, 
who  was  noted  for  the  number  of  companies  he  incorpo- 
rated, strongly  recommended,  in  an  address  in  Boston, 
the  passage  of  a  law  by  Congress  under  which  companies 
could  obtain  a  national  incorporation,  securing  certain 
valuable  rights  from  Congress  over  State-incorporated 

*  It  does  not  necessarily  follow  that  because  a  company  is  incor- 
porated in  New  Jersey  it  is  intended  simply  to  exploit  the  public, 
for  a  great  many  reputable  capitalists  have  availed  themselves  of 
the  liberal  laws  of  the  State  for  legitimate  purposes. 


THE  STOCK  COMPANY  111 

companies,  but  also  being  subject  to  a  certain  amount 
of  governmental  supervision.  This  he  advocated  as 
meeting,  in  large  measure,  the  problem  of  the  ''trusts," 
and  the  idea  has  been  since  adopted  by  a  number  of  po- 
litical and  industrial  leaders. 

A  trust,  in  the  true  sense  of  the  word,  is  a  combina- 
tion of  companies,  the  majority  stockholders  of  which 
assign  their  shares  to  a  certain  number  of  trustees,  giv- 
ing them  an  irrevocable  power  of  attorney.  This  effect- 
ive form  of  combination  has  gone  out  of  existence,  hav- 
ing been  declared  illegal  under  the  Sherman  anti-trust 
law.  The  Standard  Oil  Corporation  used  to  be  a  trust  of 
this  kind,  but  afterwards  became  a  regularly  organized 
holding  company,  which  was  also  declared  illegal  in  1911 
and  dissolved. 

Prof.  J.  F.  Jenks  has  described  a  trust  as  "a  combi- 
nation of  manufacturing  corporations  with  so  great  capi- 
tal and  power  as  to  be  considered  by  the  public  to  have 
become  a  menace  to  its  welfare  and  to  have  temporarily, 
at  least,  considerable  monopolistic  power." 

A  more  precise  definition  is  that  adopted  for  the  pur- 
pose of  the  twelfth  census,  and  which  may  therefore  be 
accepted  as  an  official  definition.  This  defined  a  trust  to 
be  a  company,  organized  to  own  and  control  a  large 
number  of  factories  or  mills  which  were  formerly  inde- 
pendent of  each  other,  and  whose  business  extends  over 
the  entire  country;  or  else  a  company  organized  simply 
for  the  purpose  of  owning  and  holding  the  stocks  of 
other  corporations,  but  not  directly  owning  the  plants 
or  carrying  on  the  business  of  manufacturing. 

Holding1  Companies. — Holding  companies  are  a  com- 
paratively recent  discovery,  but  there  are  several  that 
have  been  in  existence  for  many  years.  This  scheme  of 
combination  was  brought  into  special  prominence  by  the 
organization  of  the  Northern  Securities  Company  for 


112  WORK  OF  WALL  STREET 

the  purpose  of  holding  the  stocks  of  the  Great  North- 
ern and  Northern  Pacific  Railroads,  which  was  judicially 
declared  to  be  illegal.  The  holding  company  is  an  ef- 
fective agency  for  the  promotion  of  monopoly,  and  yet 
it  has  been  used  for  effecting  beneficial  consolidations 
that  did  not  create  monopolies.  The  chief  objections 
to  the  holding  company  are  summed  up  by  the  Railroad 
Securities  Commission  as  follows: 

Any  artificial  stimulus  to  these  Intercorporate  holdings  is  a 
public  evil.  Where  a  railroad  controls  the  operations  of  another 
railroad  by  owning  a  majority  of  its  stock,  or  where  a  holding 
company  controls  the  operations  of  several  roads  in  the  same 
manner,  we  have  all  the  disadvantages  of  consolidation,  with- 
out getting  all  of  Its  advantages.  We  get  the  centralization  of 
financial  power ;  we  do  not  get  all  the  economy  of  operation  which 
should  go  with  it  Apart  from  this  general  danger,  we  open  the 
way  to  several  specific  evils. 

Where  a  railroad  controls  the  operations  of  another  road  by 
the  ownership  of  a  majority  of  its  stock,  there  is  constant  dan- 
ger that  the  minority  holders  will  not  be  fairly  treated.  The 
road  thus  purchased  has  become  part  of  a  large  system,  and  Is 
operated  by  the  representatives  of  the  whole  system.  It  is  al- 
most certain  that  the  advantage  of  the  whole  will  be  preferred 
to  the  separate  interests  of  the  part  in  matters  of  operation,  traf- 
fic and  finance. 

Again,  the  existence  of  two  or  more  companies  under  the  same 
management,  having  separate  organizations  but  united  control,  in- 
vites the  concealment  of  financial  transactions  by  the  shifting  of 
charges  from  one  company  to  another. 

Change  in  Meaning. — It  is  thus  seen  that  the  meaning 
of  the  word  "trust"  has  changed. 

First,  it  meant  a  number  of  formerly  competing  com- 
panies combined  by  means  of  a  limited  number  of  in- 
dividuals acting  as  trustees. 

Second,  it  meant  the  same  combination  effected  by 
means  of  the  control  of  the  different  companies  being 
owned  by  a  holding  company. 


THE  STOCK  COMPANY  113 

Third,  it  now  practically  means  any  big  corporation 
which  has  acquired  great  wealth  and  power  so  as  to 
exercise  what  amounts  to  an  overshadowing  influence 
in  any  given  trade. 

Stock  Watering. — In  the  organization  of  companies 
several  evils  have  developed,  one  being  "stock  water- 
ing." This  is  the  very  felicitous  Wall  Street  term  for 
fictitious  capitalization.  It  has  been  said  by  bankers 
who  ought  to  know  that  large  industrial  companies  have 
been  so  vastly  overcapitalized  that  the  common  stock 
represented  "water"  or  no  actual  investment,  and  that 
only  the  preferred  stock  represented  actual  investment. 
This  assertion  seemed  to  be  confirmed  by  Bulletin  122i 
of  the  census  of  1900.  This  gave  the  amount  of  stocks 
and  bonds  actually  issued  by  183  industrial  corporations, 
covered  by  its  report,  as  $3,085,200,868,  while  the  true 
value  of  the  capital  invested  is  only  $1,458,522,573.  The 
preferred  stock  of  these  companies  was  $1,066,525,963, 
slightly  less  than  the  true  value. 

Capitalizing  Earning  Power. — In  capitalizing  a  new 
combination  the  usual  rule  was  to  capitalize  the  earning 
capacity  rather  than  the  money  actually  invested  in  the 
plant.  For  instance,  if  the  actual  cost  of  a  plant  was 
$1,000,000,  while  its  earning  capacity  is  $300,000  a  year, 
it  might  not  be  capitalized  at  cost,  which  would  yield 
30  per  cent,  dividends,  but  at,  say,  $3,000,000,  which 
would  yield  10  per  cent.  It  may  be  said  in  justification 
that,  while  the  plant  may  have  cost  only  $1,000,000,  its 
true  value  should  be  measured  not  by  what  it  cost,  but 
by  what  it  earns,  and  that  the  capitalization  of  $3,000,000 
therefore  represents  value,  not  water. 

Capitalizing  Possibilities. — But  in  many  instances  the 
plant  is  capitalized  not  on  the  basis  of  what  it  earns, 
but  what  it  might,  could,  or  should  earn,  and  that  in 
addition  the  capitalization  is  swelled  by  the  bonuses  de- 


114  WORK  OF  WALL  STREET 

manded  by  the  promoters  and  bankers.  James  B.  Dill, 
in  writing  on  this  subject,  has  shown  how  plants  worth, 
say,  $5,000,000  may  be  capitalized  for  $30,000,000,  the 
difference  representing  in  no  sense  of  the  word  true 
value,  but  simply  the  water  injected  into  the  enterprise, 
just  as  the  dishonest  dairyman  waters  his  milk.  Then, 
says  Mr.  Dill,  the  promoter  and  the  banker  sell  their 
stock  for  what  it  will  bring,  and  the  company  is  left  in 
the  hands  of  stockholders  with  immense  charges  to  pay 
on  watered  stock.  Mr.  Dill  said  that  this  evil  could  be 
prevented  by  a  law  like  that  existing  in  England,  which 
prohibits  any  promoter  or  company  to  advertise  the  cap- 
ital stock  for  sale  without  stating  the  actual  amount  paid 
into  the  company. 

The  industrial  commission  appointed  by  President 
McKinley  recommended  that  all  the  States  enact  laws  to 
prevent  stock  watering  like  those  existing  in  Massa- 
chusetts. It  was  shown  by  evidence  produced  before 
this  commission  that  some  trusts  have  been  financed  on 
this  basis:  For  every  $10  of  cash  or  tangible  property 
secured  $60  of  stock  was  issued,  representing  $15  to  the 
promoter,  $20  to  the  seller  entering  the  combination,  and 
$25  to  the  underwriting  syndicate. 

Corporation  Problem. — In  view  of  the  enormous  con- 
tribution limited  liability  stock  companies  are  making 
to  the  civilization  of  the  world,  and  of  the  opportunity 
they  give  of  abuse  of  power,  the  question  of  their  proper 
promotion,  organization,  size,  capitalization  and  admin- 
istration has  become  one  of  the  gravest  problems  in  this 
country  at  the  opening  of  the  twentieth  century.  The 
future  of  American  business  depends  upon  a  solution 
that  will  preserve  the  co-operative  advantages  of  stock 
companies  without  the  danger  of  their  becoming  more 
powerful  than  the  governments  which  grant  them  their 
privileges.  That  solution  must  be  worked  out  by  those 


THE  STOCK  COMPANY  115 

who  comprehend  both  the  inestimable  benefits  and  the 
necessary  limitations  of  co-operation  in  accomplishing 
the  world's  work. 

As  an  aid  to  solution,  it  may  be  useful  to  recapitulate 
the  chief  benefits  and  the  chief  evils  of  stock  companies. 

Benefits. — 1.  Co-operation:  By  bringing  a  multitude 
of  capitalists  together  in  the  advancement  of  a  single 
enterprise. 

2.  Efficiency:  By    creating    an    organization    strong 
enough  to  engage  in  big  competition. 

3.  Economy;  By  eliminating  many  of  the  wastes  in- 
cident   to    "individual,    cut-throat,    parochial    competi- 
tion." 

4.  Limited  liability:  By  which  many  individuals  may 
become  partners  in  an  enterprise  without  risking  more 
than  they  individually  put  into  it. 

5.  Continuity:  By    establishing    a    corporation,    the 
continued  existence  of  which  does  not  depend  upon  the 
life  of  any  one  engaged  in  it. 

6.  Diffusion  of  wealth:  Which  is  made  possible  by 
the  shares  of  stock,  so  issued  as  to  make  investment  easy, 
even  for  persons  of  small  means. 

7.  Concentration  of  control:  By  which  it  is  only  pos- 
sible to  secure  the  highest  effectiveness  of  administra- 
tion. 

8.  Democracy:  Because    the    stock    company    is    or- 
ganized like  a  republic,  and  is  based  upon  the  right  of 
suffrage,  stockholders  being  the  citizens  of  the  corpora- 
tion; and  because  in  a  stock  company  everybody  is  an 
employe;  and  therefore  with  the  rapid  substitution  of 
stock  corporations  for  individual  and  partnership  busi- 
ness, the  old  distinction  between  capitalist  and  laborer 
is  gradually  eliminated,  for  everybody  becomes  at  once 
capitalist  and  wage  earner. 

9.  Mobility  of  capital:  By  the  ease,  convenience,  and 


116  WORK  OF  WALL  STREET 

safety,  with  which  capital  can  be  transferred  from  one 
owner  to  another,  by  means  of  the  negotiable  stock 
certificate  and  by  the  admirable  simplicity  of  stock- 
market  methods. 

10.  Measure  of  value:  Because  the  market  price  of  a 
stock  certificate  constitutes  the  best  attainable  method 
of  valuation ;  and  every  owner  of  a  listed  security  knows 
what  he  can  get  for  it  by  sale,  or  as  security  for  a  loan. 

Defects. — 1.  Impersonality:  The  stock  company  is  a 
sort  of  legalized  person  without  personality,  hence  the 
saying  that  "a  corporation  has  no  soul."  There  is  a 
large  measure  of  truth  in  the  statement  made  by  Rabbi 
Wise  that  "business  which  has  become  too  largely  im- 
personal, needs  to  be  repersonalized";  so  that,  as  Thoreau 
says,  "a  corporation  of  conscientious  men  shall  be  a  cor- 
poration with  a  conscience."  To  that  fine  ideal  we  are 
approaching  more  speedily  than  many  people  imagine, 
for  too  many  of  us  are  apt  to  think  the  worst  rather 
than  the  best  of  existing  institutions. 

2.  Monopoly:  Undoubtedly  the  stock  company  makes 
monopoly  easier  of  attainment,  and  the  holding  company, 
although  not  always  a  monopoly,  has  become  the  con- 
venient tool  of  monopoly,  which  is  odious  to  the  Anglo- 
Saxon  ideal  of  liberty  and  equality  of  opportunity. 

3.  Power:  It  has  been  said  that  concentration  pro- 
motes   effectiveness    of    administration    and    ability    for 
great   conquests   in   commercial   competition.     But   con- 
centration  constitutes   power;   and   although   the  stock 
company  derives  its  authority  and  rights  from  the  gov- 
ernment which  incorporates  it,  it  may,  by  its  accumula- 
tion of  capital,  attain  a  power  mightier  even  than  that 
of   the    State.    There    are   several    corporations    in    the 
United  States  which  are  greater  than  most  of  the  States 
of  the  Union.     This  power  even  when  wisely  adminis- 
tered and  when,  as  is  generally  admitted,  it  vastly  pro- 


THE  STOCK  COMPANY  117 

motes  the  ability  of  this  country  to  compete  effectively 
in  the  markets  of  the  world,  excites  envy  among  the  en- 
vious and  fear  among  many  good  people,  and  this  gives 
rise  to  misunderstanding,  political  controversy  and  com- 
mercial distress.  There  is,  therefore,  the  peril  of  busi- 
ness bossing  the  government,  or  of  the  government  boss- 
ing business,  either  of  which  is  bad. 

4.  Oppression:  As   in  the   exercise   of  all  power,  so 
in  the  administration  of  the  stock  corporation  oppression 
has  been  made  possible,  because,  with  stockholders  scat- 
tered over  a  wide  territory  it  is  difficult  to  organize  them 
for  effective  oversight  of  their  business,  so  that  directors 
•may  exercise  too  arbitrary  an  authority.     In  England 
stockholders'  meetings  are  largely  attended  and  consti- 
tute  effective   corporation  parliaments.     Not  so   in  the 
United  States.     But  this  defect  is  being  rapidly  over- 
come by  the  extension  of  publicity,  not  only  that  en- 
forced by  governmental  action,  but  also  by  the  voluntary 
action  of  big  companies,  which  are  steadily  improving 
in  the  character,  fullness  and  timeliness  of  their  regular 
reports  so  that  stockholders  and  investors  may  be  well 
informed. 

5.  Par  value :  By  which  a  confusing  and  mischievous 
distinction  is  raised  between  normal  capitalization  and 
market  price. 

6.  Criminal  promotion:  A  lot  of  financial  " crooks" 
use  the  stock  company  as  a  burglar's  jimmy  in  order  to 
get  hold  of  other  people's  money.     How  convenient  it 
is  for  them  to  organize  a  bogus  company  with  a  ficti- 
tious capital,  a  flamboyant  prospectus,  and  a  lying  ad- 
vertisement,  and   proceed  to  induce  foolish   capitalists 
to  part  with  their  money  for  a  piece  of  engraved  but 
worthless   paper.     It   was   recently   estimated   that   up- 
wards of  $100,000,000  a  year  is  taken  in  this  way  out 
of  the  pockets  of  the  small  savers  in  this  country.    Is 


118  WORK  OF  WALL  STREET 

it  any  wonder  that  this  causes  many  unthinking  people 
to  attack  the  stock  company  and  the  stock-market,  be- 
ing unable  to  distinguish  between  what  is  good  and  what 
is  bad,  between  the  beneficent  use,  and  the  incidental 
abuse. 

Organization. — The  control  of  a  company  is  vested  in 
a  board  of  directors,  usually  elected  annually  by  the 
stockholders.  These  directors  commonly  exercise  abso- 
lute power,  only  such  questions  as  a  proposed  increase 
in  capital  being  submitted  to  a  direct  vote  of  the  stock- 
holders, and  sometimes  they  do  not  even  decide  that. 
The  board  of  directors  is,  in  turn,  controlled  by  an  ex- 
ecutive committee,  and  this  committee  is  not  infre- 
quently controlled  by  one  capitalist  whose  interest  in 
the  corporation  is  larger  than  that  of  the  other  stock- 
holders. The  annual  meetings  are  usually  attended  only 
by  a  few  holders  of  stocks.  Elections  are  decided  by 
proxies  held  in  the  name  of  one  or  two  of  the  managing 
directors.  The  average  stockholder  carries  his  stock 
merely  for  the  dividends,  and  leaves  the  burden  of  man- 
agement entirely  to  the  directors.  The  largest  stock- 
holder, as  has  been  said,  controls  the  corporation,  even 
though  his  individual  interest  may  be  less  than  an  actual 
majority  of  the  stock.  There  have  been  cases,  indeed, 
when  a  company  has  been  controlled  by  a  man  whose 
individual  interest  was  comparatively  small.  Events 
have  shown,  however,  that  absolute  ownership  of  a  ma- 
jority of  the  shares  may  be  essential  to  security  of  con- 
trol, though  the  majority  of  the  big  corporations  are 
not  controlled  in  that  way  by  the  banking  and  moneyed 
interests.*  A  director  of  a  great  corporation  whose  se- 

*  There  has  been  more  than  one  instance  of  the  managers  of  a 
corporation,  apparently  in  secure  control,  waking  up  suddenly  to 
find  that  the  majority  of  the  stock  has  been  bought  by  some  other, 
and  perhaps  rival,  interest.  How  to  safeguard  their  control  has 
therefore  become  a  problem  with  directors.  Ten  years  ago,  claiming 


THE  STOCK  COMPANY  119 

curities  are  listed  on  the  Stock  Exchange  is  an  influen- 
tial individual,  with  sources  of  information  denied  to 
others.  He  is,  if  he  uses  his  opportunities,  the  true  "in- 
sider" of  the  stock-market. 

Stock  Certificates. — Certificates  of  stock  are  engraved 
pieces  of  paper,  signed  usually  by  the  president  and  the 
treasurer  of  the  company,  specifying  that  the  holder 
whose  name  is  written  on  the  certificate  is  the  owner 
of  a  certain  number  of  shares.  It  is  specified  that  the 
shares  are  transferable  only  on  the  books  of  the  cor- 
poration in  person  or  by  attorney  upon  surrender  of 
the  certificate.  On  the  back  of  the  certificate  is  printed 
a  blank  providing  for  the  transfer  of  the  stock  upon 
sale,  the  new  owner  being  constituted  an  attorney  for 
the  purpose  of  transfer.  In  Wall  Street,  certificates  of 
stock  are  usually  made  out  for  100  shares,  the  bulk  of 
the  transactions  in  the  Stock  Exchange  being  in  100 
share  lots.  A  man  may  own  10,000  shares,  but  he  will 
have  them  divided  into  100  certificates  of  100  shares 
each  for  convenience.  Odd  share  lots,  as,  for  instance, 
certificates  representing  23  shares,  are  at  a  manifest  dis- 
advantage in  speculation. 

Engraving  of  Securities. — The  rules  of  the  Stock  Ex- 
change require  that  certificates  of  stock,  as  well  as  every 

that  "the  day  of  proxy  control  is  passed,"  some  of  the  managers  of 
great  railroad  and  industrial  corporations  schemed  to  make  their 
control  absolute  and  safe  without  being  compelled  to  lock  up  their 
money  in  an  actual  ownership  of  a  majority  of  the  stock.  They 
wanted  to  control  the  property  and  still  be  able  to  employ  their 
capital  in  other  enterprises  or  speculations.  In  the  reorganization 
of  the  Chicago,  Rock  Island  &  Pacific  Railroad  a  device  of  this  kind 
was  introduced.  The  control  of  the  road  was  given  to  the  preferred 
stock,  which  elects  a  majority  of  the  directors.  Capitalists  owning 
one-half  of  the  preferred  stock,  or  $27,000,000,  could  therefore  con- 
trol a  company  whose  aggregate  common  and  preferred  stock 
amounted  to  $150,000,000.  This  plan  is  contrary  to  the  American 
principle  of  government  by  the  majority,  and  it  has  been  severely 
criticised,  although  it  is  upheld  by  a  number  of  prominent  capital- 
ists. 

10 


120  WORK  OF  WALL  STREET 

bond,  must  be  printed  from  steel  plates  engraved  in  the 
best  manner  which  will  afford  the  amplest  security 
against  counterfeiting.  There  must  be  two  steel  plates, 
namely,  a  face-plate  containing  the  vignettes  and  letter- 
ing of  the  description  or  promissory  portion  of  the  docu- 
ment, which  should  be  printed  in  black  or  black  mixed 
with  a  color ;  and  a  tin  plate  from  which  should  be  made 
a  printing  in  an  antiphotographic  color,  so  arranged  as 
to  underline  important  portions  of  the  face  printing. 
The  two  printings  must  be  so  made  upon  the  paper  that 
the  combined  effect  of  the  whole,  if  photographed,  would 
be  a  confused  mass  of  lines  and  forms,  so  as  to  give 
security  against  counterfeiting  by  scientific  or  other 
processes.  The  Exchange  requires  a  distinctive  plate 
for  100  share  certificates,  so  that  they  may  be  readily 
distinguished  from  certificates  representing  other 
amounts  of  stock.  The  Exchange  also  requires  that  the 
engraving  shall  be  done  by  some  concern  approved  by 
the  governing  committee.  It  has  therefore  been  charged 
with  fostering  a  monopoly,  but  the  Exchange  holds  that 
its  requirement  is  necessary  for  the  protection  of  in- 
vestors. 

Different  Kinds  of  Stock. — It  has  already  been  indi- 
cated that  there  are  two  kinds  of  stock,  preferred  and 
common.  In  England  there  are  also  founder  shares, 
vendor  shares,  deferred  shares,  and  debenture  shares, 
but  these  are  practically  unknown  in  this  country.  Pre- 
ferred stock  has  a  fixed  rate  of  dividend  attached  to  it, 
which  must  be  paid  before  the  common  stockholders  can 
receive  anything.  Such  dividends  may  be  cumulative 
or  non-cumulative.  If  cumulative,  any  dividend  not 
paid  this  year  must  be  paid  out  of  the  profits  of  any 
future  year.  The  dividends  accumulate  until  paid.  Pre- 
ferred stock  differs  from  a  bond  in  that  it  is  not  secured 
by  a  mortgage  on  the  property,  while  the  holder,  in  the 


THE  STOCK  COMPANY  121 

United  States,  generally  has  a  voice  and  vote  in  the  man- 
agement. The  preferred  stockholder  is  thus  not  a  cred- 
itor, but  a  preferred  partner  in  the  concern.  The  com- 
mon stock  is  entitled  to  all  the  earnings  after  the  interest 
on  the  bonds  and  the  dividends  on  the  preferred  stocks 
have  been  paid.  Its  rate  of  dividend  thus  depends  on 
the  profits  of  the  company.  The  common  stock  is  there- 
fore the  speculative  commodity  of  the  Street.  Preferred 
stock  is  as  a  rule  bought  for  investment,  and  common 
stock  for  speculation.  Many  companies  have  only  com- 
mon stock,  and  common  stock  may  become  so  steadily 
a  dividend  payer,  and  thus  so  valuable,  that  it  enters 
into  the  class  of  investment  securities  and  is  no  longer 
speculative. 

Bonds. — Bonds  represent  the  funded  debt  of  a  com- 
pany, and  are  usually  secured  by  some  mortgage  on  its 
property.  They  are  of  various  kinds.  The  first-mort- 
gage bond  usually  stands  highest,  in  that  it  has  a  first 
lien  on  the  property  covered  by  the  mortgage.  In  some 
cases,  however,  prior-lien  bonds  are  issued,  and  these, 
as  their  name  indicates,  take  precedence.  Second-  and 
third-mortgage  bonds  take  rank  after  the  first.  Con- 
solidated bonds  is  a  name  usually  given  for  bonds  issued 
in  place  of  other  bonds,  the  various  mortgages  being 
consolidated.  This  operation  is  generally  the  result  of 
a  reorganization. 

There  are  various  classes  of  bonds  whose  names  indi- 
cate the  character  of  the  security  pledged  for  their  pay- 
ment. Thus,  equipment  bonds  are  secured  by  a  mort- 
gage on  the  rolling-stock  of  a  railroad.  Land-grant 
bonds  are  secured  by  lands  owned  by  the  railroad,  and 
are  redeemed  by  the  proceeds  of  the  sale  of  the  lands. 
Collateral  bonds  are  secured  by  pledges  of  stocks  and 
bonds  of  other  companies  held  by  the  corporation  issuing 
the  bonds.  Collateral  bonds  have  become  very  promi- 


122  WORK  OF  WALL  STREET 

nent  in  the  Street,  especially  in  the  last  few  years.  A 
railroad  buys  control  of  a  connecting  or  rival  line,  and 
pays  for  the  same  by  issuing  bonds  secured  by  the  se- 
curities of  the  line  thus  acquired.  Income  bonds  are 
virtually  unsecured,  and  pay  interest  only  when  earned. 
Debenture  bonds  are  very  common  in  England,  and  are 
becoming  more  so  in  this  country.  They  are  practically 
unsecured  pledges  to  pay.  They  are  similar  in  principle 
to  the  single-named  paper  of  a  merchant,  discounted  by 
a  bank.  Convertible  bonds  are  bonds  which  can  be  con- 
verted into  some  other  form  of  security,  usually  stocks. 

Registered  bonds  are  bonds  recorded  on  the  books  of 
the  corporation  in  the  names  of  their  holders  to  whom 
the  interest  is  sent.  Coupon  bonds  are  bonds  to  which 
are  attached  dated  certificates  representing  the  interest 
due  on  the  bond  at  the  regular  periods  of  payment. 
These  may  be  cut  off  from  the  bond  and  the  interest 
collected  through  the  banks  the  same  as  checks.  If  not 
paid  they  may  be  collected  by  suit,  the  same  as  the 
principal. 

Foreclosure  and  Reorganization. — In  the  case  of  the 
default  in  interest  the  bondholders  can  foreclose  the 
mortgage.  The  legal  forms  gone  through  are  generally 
the  same  as  those  in  foreclosing  the  mortgage  on  a 
house.  There  is,  however,  this  practical  difference:  the 
house  is  actually  sold  to  satisfy  the  debt.  In  the  case 
of  a  railroad  there  is  a  reorganization — that  is  to  say,  a 
general  rearrangement  of  the  capitalization  on  a  basis 
on  which  the  company  can  pay  at  least  its  expenses  and 
fixed  charges.  In  this  reorganization,  the  first-mortgage 
bondholders  enjoying  the  highest  security  get  the  best 
terms,  while  the  stockholders,  to  save  their  interest  from 
being  entirely  wiped  out,  are  usually  subjected  to  an 
assessment;  they  are  compelled  to  supply  most  or  all  of 
the  needed  additional  capital. 


THE  STOCK  COMPANY  123 

The  great  bulk  of  the  bonds  traded  in  in  "Wall  Street 
are  issued  by  -railroads.  Industrial  companies,  however, 
have  issued  them  in  considerable  amounts. 

Out  of  the  gross  earnings  of  the  company  is  first  paid 
the  cost  of  its  operation.  Then  must  be  paid  the  fixed 
charges  which  are  the  interest  on  its  bonds  in  the  order 
of  their  standing.  Out  of  the  surplus  must  be  paid, 
first,  the  dividends  on  the  preferred  stock,  if  there  is 
any.  What  remains  is.  applicable  to  the  payment  of  divi- 
dends on  the  common  stock,  but  the  directors  may  out 
of  this  sum  use  part  or  all  in  making  betterments  or  ex- 
tensions. This  payment  is  usually  in  such  a  case  charged 
to  operating  expenses.  Commonly,  however,  better- 
ments and  extensions  are  paid  for  by  new  issues  of 
stocks  and  bonds,  it  being  considered  legitimate  to  cap- 
italize improvements.  Dividends  are  sometimes  paid 
when  not  actually  earned.  The  earnings  for  this  quar- 
ter may  be  less  than  the  usual  dividend,  yet  it  may  be 
declared  either  because  the  earnings  of  the  preceding 
quarter  were  larger,  or  because  there  is  good  reason 
to  believe  that  the  earnings  of  the  succeeding  quarter 
will  be  more,  and  it  is  deemed  advisable  to  maintain  the 
same  rate.  But  where  the  dividends  of  a  whole  year 
are  larger  than  the  earnings  applicable  to  dividends,  it 
is  clear  that  a  debt  has  been  created  for  the  purpose, 
and  it  is  needless  to  say  that  an  increase  in  capitalization, 
or  the  creating  of  a  floating  debt,  for  the  purpose  of 
continuing  the  payment  of  dividends  and  thus  sustain- 
ing the  market  price  of  the  stock,  is  illegitimate  finance. 

Companies  have  been  organized  for  every  conceivable 
purpose.  Besides  the  two  main  Wall  Street  divisions  of 
railroads  and  industrials,  there  are  several  subdivisions, 
as,  for  instance,  franchise  companies,  including  street- 
railways  or  tractions,  telegraph,  gas,  etc. ;  manufacturing 
companies;  mining  companies;  and  finance  and  holding 


124  WORK  OF  WALL  STREET 

companies.  Admitted  to  dealings  in  the  Stock  Exchange 
are  the  securities  of  steam,  electric,  and  cable  railroads, 
coal,  iron,  copper,  express,  telegraph,  telephone,  electric- 
light  and  power,  gas,  mining,  chemical,  bicycle,  cotton- 
oil,  spirits,  tobacco,  snuff,  sugar,  paper,  match,  ice,  lin- 
seed-oil, pump,  rope,  envelope,  rubber,  dry-goods,  land 
improvement,  dock,  steamship,  marble,  fuel,  locomotives, 
woolen,  fireworks,  whiskey,  biscuit,  lead,  salt,  zinc, 
leather,  pine,  bank-note,  flour,  corn-products,  and  ferry 
companies.  In  the  stock  market  there  are  dealings  in 
other  kinds  of  companies,  including  can,  refrigerating, 
storage-battery,  lead-reduction,  securities,  carriage, 
enameling,  elevator,  baking-powder,  potteries,  coke, 
writing-paper,  thread,  type,  rubber-tire,  electric-boat, 
signal,  monotype,  bread,  stevedoring,  realty,  car-heating, 
coupler,  and  typewriter.  Speculation  companies  have 
also  been  formed,  and  some  time  ago  a  corporation  was 
organized  by  creditors  to  take  over  the  business  of  an 
•  embarrassed  merchant. 

REFERENCES 

"American  Corporations,"  John  J.  Sullivan,  1910. 
"Corporation  Finance,"  Edward  S.  Meade,  1910. 
"Trust  Finance,"  Edward  S.  Meade. 

Report  of  Railroad  Securities  Commission,  H.  R.  Document  No. 
.      256,  1911. 

"Modern  Business  Corporations,"  W.  A.  Wood,  1906. 
"Corporation  Finance,"  Francis  L.  Greene.  1901. 
"Rights  of  the  Minority  Stockholder,"  Richard  L.  Harvey,  1909. 
"Treatise  on  Stock  and  Stock-holders,"  Arthur  L.  Hellivell,  1903. 
"The  Modern  Corporation,"  Thomas  Covyugton. 


CHAPTER  IX 
LISTING  OF  SECURITIES 

To  "list"  a  stock  is  to  have  it  admitted  to  the  right 
of  being  dealt  in  on  the  Stock  Exchange.  No  stock  or 
bond  can  be  bought  or  sold  there  which  has  not  first 
been  favorably  passed  upon  by  the  Exchange  authori- 
ties. 

No  Guarantee  of  Value. — The  New  York  Stock  Ex- 
change does  not  guarantee  the  value  of  any  security 
which  it  admits  to  the  privileges  of  its  floor.  It  neither 
recommends  nor  condemns.  Each  investor  must  decide 
for  himself  the  value  of  the  securities  which  he  may 
seek  to  buy.  The  Exchange  affords  an  open  and  con- 
tinuous market,  but  makes  no  attempt  to  regulate  either 
its  prices,  so  as  to  make  them  conform  strictly  to  in- 
trinsic value,  or  the  management  of  corporations  whose 
stocks  and  bonds  may  be  listed  on  its  floor.  But  the 
.Exchange  has  certain  strict  rules  governing  the  admis- 
sion of  securities  to  its  market,  and  investors  may  rely 
upon  it  that  these  rules  are  rigidly  enforced.  Whether 
the  Exchange  goes  far  enough  in  its  regulations  for  the 
listing  of  securities  is  a  question  of  some  dispute,  but 
as  far  as  it  goes,  it  is  scrupulous  in  enforcement.  Of 
course  the  Exchange  can  hardly  assume  to  guarantee 
investors  or  to  be  the  censor  of  corporate  action.  The 
expense  and  labor  involved  in  making  an  efficient  peri- 
odical examination  in  the  affairs  of  all  the  corporations 
in  the  country  would  render  any  such  duty  a  practical 
impossibility.  Something  must  be  left  to  the  judgment 
of  the  individual.  No  system  can  entirely  protect  a  fool 
from  wasting  his  money.  The  investor  must  make  up 
*  125 


126  WORK  OF  WALL  STREET 

his  own  mind  as  to  the  value  of  securities.  The  mere 
fact  that  they  are  listed  upon  the  Stock  Exchange  should 
never  be  taken  as  a  guaranty  of  their  intrinsic  value, 
nor  could  any  system  be  devised  which  would  bring 
about  that  result. 

The  Hughes  Commission  did  not  recommend  that 
either  the  State  or  the  Exchange  should  undertake  to 
verify  the  statements  of  fact  filed  with  applications  for 
listing  on  the  ground  that  any  attempt  to  do  so  would 
give  the  securities  a  standing  in  the  eyes  of  the  public 
which  would  not  in  all  cases  be  justified.  It  did,  how- 
ever, urge  that  the  Exchange  should  compel  the  filing 
of  frequent  statements  of  financial  condition,  and  a  state- 
ment showing  exactly  for  what  capital  stock  has  been 
issued,  including  commissions  paid  to  promoters  and 
vendors. 

The  position  that  has  been  taken  by  the  authorities 
of  the  Exchange  is  that  it  is  not  the  function  of  the  Ex- 
change to  deny  or  confirm  or  criticise  reports  made  by 
corporations,  as  it  might,  by  such  a  course,  serve  to  con- 
demn or  approve  of  the  value  of  such  securities.  The 
question  of  value,  as  has  been  shown,  must  be  left  for 
each  individual  investor  to  decide  for  himself.  While 
all  statements  for  listing  purposes  are  signed  by  respon- 
sible officers  of  applying  corporations,  it  has  not  been 
found  necessary  to  demand  affidavits.  An  officer  who 
would  deliberately  put  his  signature  to  a  false  state- 
ment could  not  be  depended  upon  to  swear  truthfully 
to  it.  As  to  the  question  raised  by  the  Hughes  Com- 
mission that  statements  showing  exactly  for  what  capi- 
tal stock  has  been  issued  including  commissions,  it  has 
been  argued  by  defenders  of  the  Exchange  that  the  cost 
of  properties  which  may  come  together  in  big  combina- 
tions can  not  be  procured  or  estimated  by  the  Exchange. 
Bankers'  and  promoters'  commissions  and  profits  are 


LISTING  OF  SECURITIES  127 

generally  paid  in  securities,  and  when  cash,  is  paid  it 
is  a  matter  of  confidential  agreement. 

Publicity. — Publicity  is  the  best  protection  which  an 
investor  can  have,  and  the  greater  the  publicity,  the  bet- 
ter it  is  for  Wall  Street.  This  publicity  can  be  best  pro- 
vided for  by  the  government  through  its  laws,  but  the 
Exchanges  and  the  corporations  themselves  can  do  much 
to  promote  it.  There  are  some  trade  secrets  which,  of 
course,  a  business  concern  has  a  right  to  hold  inviolate, 
but  outside  of  these  legitimate  secrets,  which  are  as  val- 
uable as  a  patent  or  a  trade-mark,  corporate  business — 
and  especially  as  to  its  finances — should  be  conducted  as 
much  as  possible  in  the  open. 

Publicity  was  the  first  reform  advocated  by  President 
Roosevelt,  in  his  policy  of  governmental  control  over 
corporations,  and  it  was  not  only  the  first,  but  the  best; 
and  if  comprehensively  applied  would  make  other  re- 
forms almost  unnecessary.  "The  first  essential,"  said 
President  Roosevelt,  "in  determining  how  to  deal  with 
the  great  industrial  combination  is  knowledge  of  the 
facts — publicity. ' ' 

The  Railroad  Securities  Commission  declared  that  en- 
forced publicity  is  immediately  needed.  It  said  that 
stringent  provisions  regarding  publicity  of  stock  and 
bond  issues,  which  will  show  how  far  the  laws  are 
obeyed,  will  be  more  salutary  and  more  effective  than 
any  new  statutory  demands.  The  function  of  the  gov- 
ernment, it  adds,  is  to  see  that  correct  information  is 
available.  But  even  the  government  is  powerless  to  com- 
pel investors  to  act  on  this  information. 

Without  passing  upon  the  question  whether  the  New 
York  Stock  Exchange  has  done  all  that  it  might  do  to 
establish  comprehensive  publicity  in  corporate  organiza- 
tion, corporate  finances,  and  corporate  administration, 
this  at  least  may  be  said:  it  has  progressively  strength- 


128  WORK  OF  WALL'  STREET 

ened  its  rules  toward  that  ideal.  It  certainly  has  per- 
formed a  valuable  service  to  the  community  for  many 
years  by  its  regulations  in  regard  to  the  listing  of  se- 
curities. 

Safeguards  Are  Numerous. — The  Exchange  formerly 
divided  its  market  into  two  departments,  listed  and  un- 
listed, but  the  latter  was  in  1910  abolished  to  the  great 
betterment  of  the  Wall  Street  system.  The  rules  that 
must  be  complied  with  in  order  to  secure  admission  to 
the  list  are  worthy  of  some  study,  for  there  is  no  other 
branch  of  Wall  Street  mechanism  in  regard  to  which 
there  is  more  popular  misconception  than  this.  It  is 
important  for  the  investor  to  know  what  safeguards  the 
Exchange  throws  around  its  market.  It  will  be  found 
that  they  are  numerous. 

The  constitution  of  the  Exchange  provides  that  there 
shall  be  a  committee  on  stock  lists  to  consist  of  five  mem- 
bers, to  which  shall  be  referred  all  applications  for  plac- 
ing securities  on  the  list.  It  is  further  provided  that 
all  securities  placed  upon  the  list  must  be  with  the 
consent  of  the  Governing  Committee,  and  only  after  re- 
port made  by  the  Stock  List  Committee  to  the  Govern- 
ing Committee,  "with  a  full  statement  of  capital,  num- 
ber of  shares,  resources,  etc."  Thus  a  security  to  be 
admitted  to  the  list  must  pass  the  scrutiny  of  two  com- 
mittees, one  of  them  the  supreme  governing  power  of 
the  Exchange. 

The  only  exception  to  this  rule  is  that  the  Stock  List 
Committee  has  the  power  to  place  on  the  list,  without 
report  to  the  Governing  Committee,  any  obligations  of 
any  national,  state  or  city  government,  and  also  tem- 
porary receipts  issued  by  any  corporation  or  firm. 

Listing  Requirements. — The  Stock  List  Committee  has, 
under  this  constitutional  provision,  drawn  up  a  definite 
statement  of  just  what  it  requires  of  all  applications  to 


LISTING  OF  SECURITIES  129 

list.  It  is  provided  in  the  case  of  a  railroad  company 
that  there  shall  be  filed  a  statement  of  the  location  and 
description  of  the  property,  and,  when  possible,  also  a 
map  thereof.  This  statement  should  give  the  title  of  the 
company,  when  it  was  organized,  and  by  what  author- 
ity, the  route  of  road,  the  miles  of  road  completed  and 
in  operation,  contemplated  extensions,  equipment,  lia- 
bilities and  assets,  earnings,  amount  and  description  of 
mortgage  lien  or  other  indebtedness.  Also  a  statement 
of,  and  liability  for,  any  leases  guaranteed,  rentals  or 
car  trusts  and  terms  of  payment  thereof.  Also  the  num- 
ber of  shares  of  capital  stock  authorized  and  its  par 
value,  a  list  of  officers  and  directors,  the  office  of  the 
company,  the  transfer  office  and  registrar,  together  with 
their  names. 

In  the  case  of  bonds  only  issues  upon  completed  mile- 
age will  be  listed.  The  application  must  state  the 
amount  authorized,  the  date  of  issue  and  maturity,  the 
names  of  trustees,  the  par  value,  the  rate  of  interest, 
whether  subject  to  earlier  redemption  by  sinking-funds 
or  otherwise,  and  whether  convertible  into  other  forms. 
A  copy  of  the  mortgage  duly  certified  is  required,  and 
proof  that  the  mortgage  has  been  duly  recorded  is  in- 
sisted upon.  The  application  must  be  accompanied  by 
a  balance-sheet  and  statement  of  income  account  of  re- 
cent date. 

In  the  case  of  a  reorganized  company,  the  Exchange 
requires  a  complete  financial  statement  for  a  period  of 
at  least  one  year  prior  to  reorganization,  the  receipts 
and  expenditures  in  detail,  a  balance-sheet,  and  a  de- 
scription of  the  new  security  issued.  This  requirement 
was  first  made  in  February,  1895,  and  materially 
strengthened  the  rules  for  listing.  The  Exchange  recom- 
mends that  a  trust  company  should  be  appointed  as  a 
trustee  of  each  mortgage  or  trust  deed.  When  an  in- 


130  WORK  OF  WALL  STREET 

dustrial  or  manufacturing  company  applies  for  the  list- 
ing of  its  securities,  it  must  submit  the  opinion  of  coun- 
sel that  it  has  been  legally  organized  and  its  securities 
legally  issued.  If  the  company  is. the  result  of  a  consoli- 
dation— in  other  words,  a  trust — a  statement  must  be 
submitted  of  the  financial  and  physical  condition  of  the 
constituent  companies;  a  full  description  of  the  real, 
personal,  and  leased  property;  proof  that  real  estate  is 
free  and  clear  except  as  to  stated  liens;  a  report  of 
responsible  expert  accountants  showing  results  of  busi- 
ness each  year  for  at  least  two  consecutive  years,  if 
possible ;  a  balance-sheet ;  statement  of  the  powers  of  the 
directors  .under  the  charter ;  an  agreement  that  the  com- 
pany will  not  dispose  of  its  stated  interest  in  the  constit- 
uent companies  except  on  direct  authorization  of  stock- 
holders; and  that  it  will  publish  at  least  once  in  each 
year  a  properly  detailed  statement  of  its  income  and 
expenditures  of  the  preceding  year,  and  also  a  balance- 
sheet  at  the  end  of  its  last  fiscal  year.  The  Exchange 
requires  that  all  active  stocks  must  be  registered  at 
some  satisfactory  institution,  and  the  registrar  must 
state  the  amount  of  stock  registered  at  the  time  of  ap- 
plication. 

Annual  Reports. — Having  made  these  and  other  re- 
quirements, the  Stock  List  Committee  for  years  made 
the  following  recommendation: 

"The  Exchange  recommends  to  the  various  corpora- 
tions whose  securities  are  here  dealt  in,  that  they  shall 
print,  publish,  and  distribute  to  stockholders,  at  least 
fifteen  days  prior  to  annual  meetings,  a  full  report  of 
their  operations  during  the  preceding  fiscal  year;  to- 
gether with  complete  and  detailed  statements  of  all  in- 
come and  expenditures,  and  a  balance-sheet  showing 
their  financial  condition  at  the  close  of  the  given  period. 
The  Exchange  requests  that  stockholders  of  the  several 


LISTING  OF  SECURITIES 


131 


corporations  take  such,  action  as  may  be  necessary  for 
the  accomplishment  of  this  recommendation." 

The  Exchange  now  "requires"  all  corporations  to 
do  this;  and  this  in  itself  is  a  notable  contribution  to 
publicity. 

LISTINGS  ON  NEW  YORK  STOCK  EXCHANGE 


Bonds. 

Issues  for  neiv 
Capital,  dc. 

Old  Issues 
Now  Listed 

Replacing  old 
Securities. 

"a 

•K> 
g 

1011  

$ 
397,563,800 

$ 
35  122,000 

$ 
148  148  600 

$ 

580  834  400 

1910  

571,526,800- 

52,008  300 

184  627  400 

808  162  500 

1909  

712,734,963 

8,479,000 

377,742,537 

1,098  956  500 

1908  

648.8691,500 

95,794,000 

128,294,500 

872,958,000 

1907  

246,733  914 

72  362  OOG 

101  717  086 

420  813  000 

1906  

x  303,1  12,000 

12  304,500 

256  482,000 

x  571  898  500 

1905  

569,079,000 

20,000,000 

390,947,650 

980,026,650 

1904  

429,810,500 

105,269,100 

535,079,600 

1903  

a  191  515  050 

12,798  000 

376  975,750 

581  288  800 

1902  

197,516,313 

2,878,000 

333,124,987 

a  533,519,300 

Stocks. 
1911  

255,897,215 

38,000,000 

349,717,615 

643,614,830 

1910  

304,681,590 

467,175,700 

467,644,255 

1,239,501,545 

1909  

297.253,037 

363,701,600 

664,571.448 

1,325,526,085 

1908  

123  977  900 

248,780  200 

141,169,350 

513,927,450 

1907  

159,106,244 

321,056,300 

95,869.506 

576,032,050 

1906  

237,479,600 

16,440,700 

408,849,150 

662,769,450 

1905  

125,123,300 

99,889,200 

308,422,400 

533,434,900 

1904  

120,635,050 

55,231,750 

175,866,800 

1903  

172,944,200 

38,791,600 

215,154,495 

426,890,295 

1902  

251,069,400 

11,462,300 

521,500,895 

784,032,595 

Note. — Applications  for  the  listing  of  Trust  Company  receipts 
and  of  securities  marked  "assented"  (if  preparatory  to  reorgani- 
zation), or  of  securities  stamped  "assumed"  or  "assessment  paid" 
— the  securities  themselves  having  previously  been  listed — are  not 
included  in  this  table. 

a,  not  including  $1,155,000,000  Imperial  Russian  State  4%  cer- 
tificates of  rente. 

a?,  excludes  $425,000,000  Japanese  Government  bonds. 


132  WORK  OF  WALL  STREET 

The  preceding  table  is  a  statement  *  of  the  listings  of 
bonds  and  stocks  by  the  New  York  Stock  Exchange  from 
1902  to  1911  inclusive: 

The  total  of  issues  for  new  capital  in  these  years 
amounts  to  $6,316,629,376. 

*  Compiled  by  "Commercial  and  Financial  Chronicle." 


CHAPTER  X 

THE  NEW  YOKK  STOCK  EXCHANGE 

It  has  been  seen  that  with  the  progressive  issue  of 
new  certificates  representing  ownership  or  indebtedness, 
either  in  the  shape  of  national,  state,  and  city  bonds, 
or  in  the  shape  of  stocks  and  bonds  of  banks,  railroads 
and  industrial  companies,  there  has  naturally  developed 
a  market  for  the  buying  and  selling  of  these  securities. 
Wherever  this  stock-market  becomes  of  large  extent  it 
is  necessary  to  establish  a  stock  exchange  for  its  proper 
regulation.  Stock  Exchanges  now  exist  in  every  large 
city  of  Europe  and  America. 

There  are  14  Stock  Exchanges  in  the  United  States 
and  11  additional  in  other  parts  of  the  Western 
Hemisphere.  There  are  10  in  Great  Britain  and  21  ad- 
ditional in  other  parts  of  Europe,  while  in  Asia  and 
Africa  there  are  31.  Thus  87  Stock  Exchanges  exist 
in  the  world.  Of  these,  the  Exchanges  in  London,  New 
York  and  Paris  are  the  most  important. 

Objects. — The  New  York  Stock  Exchange  is  an  un- 
incorporated association  of  1,100  members,  organized  for 
the  purpose  of  supplying  a  continuous  and  regulated 
market  for  the  buying  and  selling  of  stocks  and  bonds. 
"Its  objects,"  says  the  new  constitution  adopted  in 
March,  1902,  "shall  be  to  furnish  exchange  rooms  and 
other  facilities  for  the  convenient  transaction  of  their 
business  by  its  members  as  brokers;  to  maintain  high 
standards  of  commercial  honor  and  integrity  among  its 
members;  and  to  promote  and  inculcate  just  and 
equitable  principles  of  trade  and  business." 

The  management  of  the  Exchange  has  tried  to  carry 

133 


134  WORK  OF  WALL  STREET 

these  objects  into  effect.  Whatever  may  be  justly  said 
of  the  stock-market,  no  serious  criticism  of  the  good 
faith  of  the  Exchange  can  be  made.  Its  sins  are  those 
of  omission  rather  than  commission.  It  may  at  times 
move  too  slowly  in  making  changes,  but  it  moves.  It 
insists  upon  honorable  dealings  between  its  members 
and  between  its  members  and  their  customers.  A  mem- 
ber guilty  of  fraud  is  expelled.  A  member  unable  to 
fulfill  his  contracts  is  suspended.  The  Exchange  en- 
forces strictly  its  elaborate  laws  for  the  listing  of  se- 
curities and  for  the  sale  and  delivery  of  stocks. 

Its  Proper  Jurisdiction. — Those  who  hold  that  it 
should  do  much  more  than  it  does  should  remember 
that  there  is  a  limit  to  its  powers  and  responsibilities. 
John  R.  Dos  Passes,  who  is  an  acknowledged  authority 
on  the  law  of  Wall  Street,  holds  that  it  seems  entirely 
reasonable  "to  confine  and  limit  the  jurisdiction  of  the 
Stock  Exchange  to  those  matters  which  arise  between 
its  members  in  the  course  of  their  business  with  each 
other  as  brokers;  otherwise  its  judicial  powers  might  be 
extended  to  embrace  every  affair  of  human  life,  which 
was  never  intended,  and  which  the  law  would  not  per- 
mit/' 

Membership. — In  1869,  after  the  consolidation  of  the 
Stock  Exchange,  the  Open  Board  of  Brokers,  and  the 
Government  Bond  Department,  the  membership  of  the 
united  body  was  1,060,  but  ten  years  later,  40  additional 
memberships  were  created  and  sold  to  defray  the  cost 
of  an  enlargement  of  the  Board-Room.  Since  then  there 
has  been  no  increase  in  membership,  and  the  constitu- 
tion provides  that  there  shall  be  no  increase  except  by 
the  action  of  the  Governing  Committee  subject  to  ap- 
proval by  a  majority  of  the  members. 

While  located  in  New  York,  the  Exchange  is  actually 
a  national  institution.  There  are  stock  exchanges  in 


THE  NEW  YORK  STOCK  EXCHANGE  135 

other  cities,  but  these  are  local  institutions,  and  their 
markets  restricted  for  the  most  part  to  dealings  in  local 
stocks.  But  the  New  York  Stock  Exchange  deals  in  the 
securities  of  the  entire  nation,  and  its  membership  repre- 
sents many  different  parts  of  the  country.  There  were, 
in  1911,  104  out-of-town  members,  including  32  of  Phila- 
delphia, 17  of  Chicago,  and  20  of  Boston.  St.  Louis, 
Baltimore,  Buffalo,  Rochester,  Kansas  City,  Richmond, 
Washington,  San  Francisco,  Pittsburgh,  Minneapolis, 
Cincinnati,  New  Orleans,  and  other  cities  are  represented 
in  the  membership. 

Many  of  the  members  maintain  branch  offices.  These 
numbered  505,  most  of  them  being  in  New  York  City 
itself,  but  a  great  number  scattered  among  50  different 
cities  and  towns  in  the  United  States  and  Canada,  as 
well  as  in  London,  Paris,  Berlin  and  Hamburg.  There 
is  a  branch  house  as  far  West  as  Denver,  and  another 
as  far  North  as  Toronto.  Three  firms  maintain  as  many 
as  eleven  branch  offices. 

The  1,100  members  of  the  Exchange  represent  583 
firms,  in  which  there  are  2,006  partners.  Usually  a  firm 
is  content  to  have  only  one  partner  in  the  Exchange, 
but  there  are  many  which  have  two  or  three  and  there 
is  one  firm  of  ten  partners,  eight  of  whom  are  members 
of  the  Board. 

It  does  not  follow  that  because  there  are  1,100  mem- 
bers they  are  all  brokers.  As  a  matter  of  fact,  only  a 
part  of  them  are.  Among  the  members  are  such  great 
capitalists  as  John  D.  Rockefeller,  William  Rockefeller, 
George  J.  Gould,  Edwin  Gould,  Frank  J.  Gould,  Howard 
Gould,  August  Belmont  and  Edwin  Hawley,*  men  who 
never  execute  an  order  on  the  floor,  and  who  rarely,  if 
ever,  are  seen  there.  These  men  employ  brokers.  They 
are  principals.  Membership  in  the  Exchange  gives  them 

*  Deceased. 
11 


136  WORK  OF  WALL  STREET 

the  advantage  of  a  lower  rate  of  commission  than  they 
could  command  as  outsiders. 

Their  memberships  represent  to  each  of  them  in  in- 
terest on  market  price  of  seats  and  annual  dues  an 
expenditure  of  $3,250  a  year  more  or  less  as  the  price 
of  seats  advances  or  declines;  but  they  are  able  to  save 
more  than  that  in  commissions.  There  are  others  who 
were  formerly  active  brokers,  but  who  now  have  joined 
the  class  of  principals.  There  are  other  members,  heads 
of  large  banking  or  commission  houses,  who  are  seldom 
seen  on  the  floor,  but  intrust  the  interests  of  their  firms 
there  to  junior  partners.  Moreover,  many  of  the  most 
prominent  men  in  the  Street  are  not  members  of  the 
Exchange.  J.  Pierpont  Morgan  is  not  a  member,  but 
his  son  of  the  same  name  is.  Although  James  R.  Keene 
was  for  years  one  of  the  noted  stock  operators  in  the 
Street,  he  is  not  a  member. 

Two-Dollar  Brokers. — It  is  estimated  that  the  members 
and  their  employes  form  an  army  of  at  least  15,000  work- 
ers. There  are  many  members  who  maintain  no  offices  of 
their  own  but  clear  their  business  through  other  mem- 
bers. There  are  a  number  of  houses  which  confine  their 
business  to  clearing  for  this  class  of  members.  Then 
there  are  other  members  who  serve  as  brokers  for 
brokers.  They  constitute  the  large  class,  estimated  to 
number  250,  of  what  are  called  "two-dollar  brokers" — 
that  is  to  say,  they  execute  orders  for  other  brokers 
at  the  low  but  legal  rate  of  $2  per  100  shares.  The 
same  business  would  cost  an  outsider  $12.50. 

Boom  Traders. — There  is  another  class  of  mem- 
bers who  are  known  as  "Room  Traders."  These  do 
not  execute  orders  for  others,  but  buy  and  sell 
for  their  own  account  alone.  Most  brokers  specu- 
late for  their  own  account  to  some  extent,  al- 
though many  make  it  a  rule  to  confine  themselves  to  a 


THE  NEW  YORK  STOCK  EXCHANGE  137 

strict  commission  business.  But  Room  Traders  are  pro- 
fessional speculators,  who  act  at  the  same  time  as  prin- 
cipals and  agents — that  is  to  say,  they  execute  their 
own  orders.  There  are  between  50  and  100  of  these 
Room  Traders  who  enjoy  the  privilege  of  being  all  the 
time  on  the  floor  of  the  Board-Room,  and  thus  able  to 
take  advantage  at  once  of  every  opening.  They  know 
the  prices  'even  before  they  are  recorded  on  the  tape, 
and  they  are  able  to  join  in  every  upward  movement 
the  moment  it  begins,  and  to  abandon  it  the  moment  it 
shows  signs  of  wavering.  They  are  in  and  out  of  the 
market  perhaps  a  dozen  times  a  day.  They  constitute 
an  important  element  in  it. 

Specialists. — There  is  still  another  class  of  members. 
They  are  "Specialists" — that  is,  brokers  who  make  a 
specialty  of  one  or  two  or  three  securities  alone,  these 
securities  being  usually  of  the  investment  class,  requir- 
ing close  and  expert  attention.  The  business  of  these 
specialists  is  also  largely  with  other  brokers.  It  will 
thus  be  seen  that  the  number  of  brokers  who  act  di- 
rectly as  agents  for  outside  traders  forms  less  than  one- 
half  of  the  Stock  Exchange  membership.  The  average 
attendance  on  the  floor  of  the  Exchange  is  between  500 
and  600. 

Membership  in  the  Exchange  being  limited  to  1,100, 
admission  is  obtainable  only  when  there  is  a  vacancy. 
Membership  is  secured  through  purchase  of  the  "seat" 
of  a  deceased  or  insolvent  member,  or  of  some  one  who 
desires  to  retire  from  business.  The  application  is 
passed  upon  by  a  Committee  on  Admissions  composed  of 
15  members.  This  committee  has  full  power  of  election, 
but  there  must  be  10  affirmative  votes.  The  applicant 
must  be  of  legal  age  and  a  citizen.  He  must  pay  an 
initiation  fee  of  $1,000  in  addition  to  the  cost  of  his  seat. 
No  certificate  or  other  evidence  of  membership  is  issued. 


138  WORK  OF  WALL  STREET 

"Seats" — The  word  "seat"  as  applied  to  a  member- 
ship is  an  inheritance  of  the  old  days  when  the  brokers 
had  individual  seats  in  the  Board-Room,  like  Senators 
in  a  Senate  chamber.  There  are  no  such  seats  now  in 
the  Board-Room,  and  very  few  chairs  of  any  kind.  The 
brokers  are  too  busy  to  sit  down.  Every  member  has 
the  right  to  transfer  his  membership  subject  to  the  ap- 
proval of  the  Committee  on  Memberships.  With  that 
approval  he  may  sell  it.  If  he  dies,  the  committee  sells 
it  and  pays  the  proceeds  to  his  heirs  after  payment  of 
any  outstanding  claims  of  the  Exchange  or  of  the  mem- 
bers thereof..  If  he  fails,  the  seat  is  sold  for  the  benefit 
of  his  creditors,  but  members  of  the  Exchange  having 
claims  upon  him  have  a  first  lien  upon  it. 

Membership  in  the  Exchange  is  an  asset  of  large  value. 
The  price  of  seats  varies,  like  the  price  of  stocks,  al- 
though not  so  volatile.  The  price  is,  however,  a  fair 
indication  of  the  activity  of  the  stock-market  in  any 
given  year.  There  are  a  few  old  members,  who  joined 
forty  or  forty-five  years  ago,  who  paid  only  $500  for 
their  seats.  In  1871  seats  were  sold  as  low  as  $2,750. 
In  the  boom  year  of  1882  the  price  reached  $32,500. 
Two  years  later,  in  the  panic,  the  price  fell  to  $20,000. 
The  next  year,  however,  it  reached  $34,000,  and  this 
remained  the  highest  price  for  many  years.  In  the 
panic  of  1893  memberships  were  quoted  at  $15,250,  and 
in  1896  as  low  as  $13,000.  Thereafter  there  was  a 
rapid  advance,  until  in  the  last  week  of  1901  sales  were 
made  at  $80,000.  At  this  price  the  total  value  of  Stock 
Exchange  seats  amounted  to  $88,000,000.  In  1902  the 
price  fell  to  $60,000,  and  later  advanced  to  $70,000. 
In  1909  seats  sold  as  high  as  $96,000,  with  an  aggregate 
value  of  $105,600,000.  In  1911  they  sold  down  to  $65,- 
000.  To  the  price  of  the  seat  must  be  added  the  initia- 
tion fee.  The  number  of  membership  transfers  varies 


THE  NEW  YORK  STOCK  EXCHANGE  139 

from  40  to  100  a  year.  One  reason  for  the  advance  in 
price  in  the  last  few  years,  apart  from  the  great  growth 
in  business,  is  the  demand  from  out-of-town  brokers 
seeking  entrance  in  the  Exchange,  and  the  demand  from 
rich  men  in  behalf  of  their  sons,  whom  they  wish  to  set 
up  in  a  genteel  business. 

Something  more  than  wealth,  however,  is  required 
in  the  applicant.  He  must  be  of  good  business  reputa- 
tion, and  must  have  no  alliances  that  would  bring  dis- 
credit on  the  Exchange.  To  a  member  who  formed  a 
partnership  with  a  man  guilty  of  dishonorable  practices 
on  Black  Friday  was  given  several  years  ago  the  alter- 
native of  giving  up  the  partnership  or  his  seat  in  the 
Exchange.  He  gave  up  the  partnership.  A  member 
who  fails  must  immediately  inform  the  president,  and  is 
suspended  until  such  time  as  he  is  able  to  make  a  sat- 
isfactory settlement  with  his  creditors. 

Then  to  secure  reinstatement  he  must  be  balloted  for 
under  the  same  conditions  as  apply  to  a  new  applicant, 
except  that  if  six  successive  ballots  are  unfavorable  to 
him  he  has  the  right  of  appeal  to  the  Governing  Com- 
mittee. The  insolvent  member,  however,  must  settle 
with  his  creditors  within  one  year,  or  his  seat  will  be 
sold,  though  the  Governing  Committee  may  extend  the 
time.  If  the  applicant  for  membership  or  for  reinstate- 
ment in  order  to  secure  favorable  action  makes  a  mis- 
statement  upon  a  material  point,  he  will  be  subject  to 
expulsion.  If  his  failure  has  been  caused  by  reckless 
or  unbusinesslike  trading,  he  may  be  declared  ineligible 
for  reinstatement. 

Expulsions. — A  two-thirds  vote  is  required  to  expel  a 
member  found  guilty  of  fraud.  Prior  to  1865  the  Ex- 
change expelled  three  members  for  fraud — one  for  de- 
ceiving a  customer  as  to  the  price  of  a  stock,  another  for 
forgery,  and  a  third  for  issuing  a  worthless  check. 


140  WORK  OF  WALL  STREET 

From  1874  to  1902  there  were  nine  expulsions — three 
in  1896  for  "bucket-shopping"  the  orders  of  customers 
(a  term  that  will  be  explained  in  another  place),  and 
the  others  for  various  forms  of  fraud.  The  most  famous 
of  the  expulsions  was  that  of  Hutchison,  John  R.  Duff's 
broker  in  the  Hannibal  and  St.  Joseph  corner.  Hutchi- 
son appealed  to  the  courts,  which  decided  that  the  Ex- 
change had  the  right  to  expel  him,  but  could  not  ap- 
propriate the  value  of  his  membership.  Up  to  that  time 
the  laws  of  the  Exchange  provided  that  the  seat  of  an 
expelled  member  escheated  to  the  Exchange. 

Any  member  directly  or  by  partner  connected  with 
any  organization  in  New  York  city  dealing  in  securities 
similar  to  those  listed  in  the  Exchange  is  liable  to  ex- 
pulsion. The  Governing  Committee  is  very  strict  in  en- 
forcing this  law.  It  has  by  resolution  prohibited  any 
connection,  direct  or  indirect,  between  its  members  with 
the  Consolidated  Stock  Exchange,  as  being  detrimental 
to  the  interests  of  the  New  York  Stock  Exchange. 
Every  member  in  New  York  is  required  to  have  a  place 
of  business  where  notices  may  be  received.  No  member 
can  represent  more  than  one  firm.  Branch  offices  must 
be  in  charge  either  of  resident  partners  or  of  salaried 
employes. 

Commissions. — The  Exchange  maintains  its  rates  of 
commissions  rigidly.  The  commissions  are  always  based 
on  the  par  value  of  the  securities  traded  in.  No  re- 
bates or  discounts  of  any  kind  are  allowed.  The  con- 
stitution provides  that  on  business  for  parties  not  mem- 
bers of  the  Exchange,  including  joint  account  transac- 
tions in  which  a  non-member  is  interested,  transactions 
for  partners  not  members  of  the  Exchange,  and  for  firms 
of  which  the  Exchange  member  or  members  are  special 
partners  only,  the  commission  shall  be  not  less  than  -J  of 
1  per  cent.  This,  as  has  been  stated,  amounts  to  $12.50 


THE  NEW  YORK  STOCK  EXCHANGE  141 

on  100  shares,  but  as  every  purchase  except  for  per- 
manent investment  is  followed  by  a  sale,  the  commission 
on  one  transaction  both  ways  amounts  to  $25.  On  every 
purchase  and  sale,  therefore,  there  must  be  an  advance 
of  at  least  £  of  1  per  cent,  to  pay  the  commission.*  Any- 
thing over  that  is  profit,  except  that  an  allowance  must 
also  be  made  for  interest. 

Business  is  done  by  members  for  members  who  do  not 
give  up  the  name  of  a  principal  at  1/32  of  1  per  cent.,  and 
for  members  giving  up  a  principal  at  1/50  of  1  per  cent. 
A  firm  having  one  of  its  general  partners  as  a  member 
of  the  Exchange  is  entitled  to  these  reduced  commis- 
sions. Violation  of  the  commission  law  is  punishable 
by  suspension  from  one  to  five  years,  but  a  second  of- 
fense means  immediate  expulsion.  A  member  can  not 
form  a  partnership  with  a  suspended  member  or  with 
any  insolvent  person. 

The  Opening. — The  Exchange  is  opened  every  business 
day  at  half-past  nine,  but  no  business  can  be  transacted 
until  ten  o'clock,  when  the  Chairman,  who  occupies  a 
seat  upon  the  rostrum,  announces  the  opening.  It  is 
the  duty  of  the  Chairman  to  open  and  close  the  Ex- 
change, preserve  order,  and  make  all  announcements, 
such  as  deaths,  insolvencies,  etc.  He  also  buys  and  sells 
stock  "under  the  rule" — that  is,  when  a  member  is  un- 
able to  make  good  deliveries,  stocks  are  bought  or  sold 
for  his  account  by  the  Chairman.  There  are  five  hours 
of  trading.  The  Exchange  closes  promptly  at  three. 
Only  loans  can  be  made  after  that  hour.  A  fine  of  $50 
is  imposed  on  a  member  who  makes  any  transaction  in 
stocks  or  bonds,  listed  or  quoted  in  the  Exchange,  after 


*  By  resolution  of  April  13,  1910,  rates  of  commission  on  mining 
shares  are  based  upon  selling  price  regardless  of  par  value,  and  are 
fixed  for  non-members  at  $12.50  per  100  shares  when  selling  at  $10 
and  above  per  share,  or  at  $6.25  when  selling  below  $10. 


142  WORK  OF  WALL  STREET 

that  hour  or  before  10  A.  M.  in  the  Exchange  or  publicly 
outside. 

As  soon  as  the  sound  of  the  Chairman's  gavel  is  heard 
at  the  opening  a  babel  of  voices  is  raised.  The  opening 
is  usually  active,  as  orders  accumulate  over  night.  To 
the  onlooker  in  the  gallery  everything  is  apparently 
noise  and  confusion.  Here  is  business,  he  would  say, 
without  any  system.  If  he  did  not  know  that  he  was 
in  the  Exchange,  he.  might  suppose  that  by  accident  he 
had  entered  a  lunatic  asylum.  He  sees  men  rush  wildly 
into  a  group  with  violent  gestures  and  raised  voices, 
push  and  struggle  and  shout,  all  apparently  to  no  pur- 
pose. But  now  and  then  he  will  observe  someone  to 
leave  the  group  and  quietly  make  a  memorandum  on  a 
pad.  In  all  that  babel  of  voices  and  mass  of  struggling 
men,  comparable  only  to  the  crush  on  the  Brooklyn 
Bridge  in  the  rush  hours,  a  sale  has  been  made  involving 
thousands  of  dollars. 

The  Stock  Exchange  was  for  years  one  of  the  show 
places  of  New  York.  Tourists  were  always  taken  there, 
and  the  galleries  were  crowded,  especially  on  days  of 
excitement,  when  the  scenes  on  the  floor  were  of  extra- 
ordinary interest.  In  the  present  Exchange  building  there 
is  a  gallery,  but  admission  is  denied  except  to  those  spe- 
cially introduced  by  members.  The  authorities  of  the 
Exchange  do  not  think  it  safe,  or  otherwise  desirable, 
that  there  should  be  a  crowd  of  unidentified  strangers 
in  the  gallery  in  times  of  excitement  or  panic. 

Method  of  Trading. — But  while  superficially  all  is  con- 
fusion worse  confounded  in  the  Board-Room,  as  a  mat- 
ter of  fact  no  system  could  be  more  simple  or  effective, 
and  all  trading  is  done  under  strict  rules  rigidly  en- 
forced. In  every  part  of  the  room  are  posts  bearing 
placards  on  which  are  printed  the  names  of  stocks. 
Every  active  security  has  its  own  place  for  dealings. 


THE  NEW  YORK  STOCK  EXCHANGE  143 

Thus,  there  is  a  Sugar  post,  a  Reading  post,  and  the  like. 
There  is  a  place  for  borrowing  stock,  and  another  for 
loaning  money.  There  are  some  posts  where  several 
stocks  are  traded  in.  Brokers  having  orders  to  buy 
Sugar  go  to  the  Sugar  post,  and  cry  out  how  much  they 
want  and  the  price  they  will  pay,  much  as  one  would 
bid  for  real  estate  at  an  auction-room,  except  that  here 
there  is  no  auctioneer. 

Bids  and  Offers. — One  broker  bids,  say,  116  for  Sugar. 
There  is  another  broker  who  has  an  order  to  sell  at  116|, 
or  there  may  be  a  dozen  offers  or  a  dozen  bids  at  the 
same  time.  The  first  bid  or  offer,  however,  when  it 
can  be  distinguished,  takes  the  precedence.  If  there  are 
more  offers  than  bids  the  market  is  weak  and  the  price 
declines.  If  the  demand  is  greater  than  the  supply, 
the  price  goes  up.  Prices  are  made  by  eighths  of  1  per 
cent.;  the  fractions  used  are  |,  ^,  -J,  etc.;  there  are  no 
thirds  or  sevenths.  No  seller  offers  a  stock  down  at  more 
than  -J  of  a  point  at  a  time.  For  instance,  if  his  offer  of 
100  brings  no  buyer,  his  next  offer  is  always  99f .  Each 
post  has  an  indicator  giving  the  last  quotation  made. 
It  is  necessary  that  the  broker  should  be  active,  strong 
of  physique  and  of  voice,  quick  to  see,  and  prompt  to 
act.  No  other  occupation  requires  more  alertness  of 
mind,  coupled  with  more  strength  of  body  and  tension 
of  nerve,  than  that  of  the  broker  of  the  Stock  Exchange. 
All  business  is  done  by  word  of  mouth.  There  are  no 
written  contracts.  A  mere  word  "sold"  or  "taken" 
closes  a  transaction  that  may  involve  $10,000,  or  even 
$1,000,000.  As  he  buys  or  sells,  the  broker  records  on  a 
little  pad,  at  the  earliest  opportunity,  the  name  of  the 
broker  of  whom  he  has  bought  or  to  whom  he  has  sold. 

The  Pads. — These  pads  are  supplied  to  the  members 
of  the  Exchange  and  are  of  uniform  size.  The  accom- 
panying cut  shows  the  size  of  one  of  these  pads,  and  it  is 


144  WORK  OF  WALL  STREET 

of  interest  as  showing  in  how  small  a  space  a  large  trans- 
action may  be  recorded: 


THE  BROKER'S  PAD 

In  this  case,  the  broker  has  bought  500  shares  of  New 
York  Central  at  162,  the  total  involved  being  $81,000. 
He  simply  recorded  the  name  of  the  seller,  the  amount, 
the  price,  and  his  own  initials.  Later,  as  will  be  ex- 
plained, there  are  comparisons  made  between  buyers 
and  sellers. 

Here,  then,  is  a  market,  or  combination  of  markets, 


THE  NEW  YORK  STOCK  EXCHANGE  145 

in  which,  strictly  speaking,  there  is  no  actual  exchange 
of  securities.  That  comes  later.  No  stock  or  bond  is 
ever  transferred  in  the  Board-Room.  All  that  takes 
place  there  is  an  oral  contract  to  sell  or  buy,  to  deliver 
or  receive,  a  certain  number  of  stocks  or  bonds  at  a 
certain  time  outside  of  the  Exchange.  These  oral  con- 
tracts to  deliver  are  generally  called  "sales,"  but  some- 
times ' '  transactions. ' ' 

Privileges  of  the  Floor. — No  one  is  allowed  on  the 
floor  except  members  and  uniformed  employes  of  the 
Exchange.  When  a  member  is  wanted  at  the  door  or 
at  the  railing  which  surrounds  the  Board-Room,  his 
name  is  given  to  an  employe,  who,  by  means  of  an 
electric  annunciator,  uncovers  a  number  which  is  as- 
signed to  each  member.  This  number  is  painted  on  a 
rectangle  of  opaque  glass  about  9  by  12  inches  in  size. 
Behind  the  glass  are  electric  lights  of  different  colors. 
If  a  number  is  wanted  at  the  telephone,  a  light  of  one 
color  is  shown,  or  if  he  is  wanted  at  the  entrance,  a 
light  of  another  color  will  flash. 

Most  of  the  orders  are  conveyed  to  the  floor  by  tele- 
phones, of  which  there  are  several  hundred  around  the 
Board-Room.  These  telephones  are  leased  by  the  indi- 
vidual members,  and  connect  with  their  offices.  Millions 
of  dollars'  worth  of  property  are  bought  or  sold  every 
day  through  the  agency  of  these  telephones. 

The  Active  Broker. — Between  the  telephone,  the  an- 
nunciator, and  the  execution  of  his  orders  in  the  various 
groups,  the  active  broker,  in  his  few  hours  on  the  Ex- 
change, works  harder  than  most  people  do  in  twice  the 
time.  He  is  under  a  severe  nervous  strain.  He  labors 
in  an  atmosphere  of  excitement,  suppressed  for  the  most 
part,  but  at  times  belching  forth  in  volcanic  fury.  Be- 
sides executing  his  orders,  he  is  supposed  to  keep  a 
watch  on  what  is  going  on  in  all  parts  of  the  room,  and 


146  WORK  OF  WALL  STREET 

to  report  to  his  office  all  rumors  that  are  circulated  and 
all  evidences  he  discovers  of  manipulation  and  other  in- 
fluences at  work.  He  must  know  what  other  brokers 
or  traders  are  selling  or  buying,  and  whom  they  are 
supposed  to  represent.  He  must  form  a  quick  judgment 
as  to  the  forces  which  are  at  work  in  the  market  and 
as  to  the  probable  rise  or  fall  of  prices. 

No  wonder  the  active  Board  member  is  usually  a 
young  man.  The  elder  members  of  the  firm  remain  in 
the  office  directing  its  affairs  and  advising  customers. 
The  juniors  have  to  enter  the  arena  of  speculation  to 
grapple  with  the  gladiators  of  the  Board-Room.  In  a 
time  of  special  excitement  this  is  no  mere  figure  of 
speech,  because  the  broker  is  obliged  to  use  physical 
force  to  push  himself  into  the  group  of  buyers  and 
sellers,  and  to  hold  his  own  and  to  make  himself  heard 
against  all  comers. 

Few  Disputes. — The  constitution  of  the  Exchange  pro- 
vides that  all  offers  made  and  accepted  shall  be  binding, 
and  it  is  creditable  to  the  members  that  the  large  trans- 
actions, made  as  they  are  orally,  are  honorably  ful- 
filled, and  comparatively  few  disputes  arise  as  to  the 
terms  of  any  contract.  In  all  offers  to  buy  or  sell,  the 
offer  must  be  accompanied  with  some  specific  number  of 
shares,  and  when  no  amount  is  named  it  is  considered, 
under  the  constitution  to  be  for  100  shares  of  stock 
of  the  par  value  of  $100  each,  or  for  $10,000  of  bonds. 
As  a  matter  of  fact,  the  bulk  of  the  transactions  is  in 
$10,000  blocks. 

Cash  and  Regular. — It  is  specified  that  bids  and  offers 
may  be  made  only  as  follows:  "Cash,"  that  is,  for  de- 
livery and  payment  upon  the  day  of  sale ;  ' '  regular, ' ' 
which  is  for  delivery  upon  the  business  day  following 
the  day  of  sale;  "at  three  days,"  that  is,  for  delivery 
upon  the  third  day  following  the  making  of  the  con- 


THE  NEW  YORK  STOCK  EXCHANGE  147 

tract;  "buyer's  or  seller's  options"  for  not  less  than 
four  days  nor  more  than  sixty  days. 

Options. — These  options  mean  that  the  buyer  has  the 
right  to  demand  the  delivery,  or  the  seller  has  the  right 
to  deliver,  at  any  time  within  the  period  of  the  option. 
This  is  a  device  which,  in  a  measure,  corresponds  to 
the  system  of  options  or  "futures"  in  grain  and  cotton 
speculations,  in  which  the  products  are  sold  to  be  de- 
livered in  some  future  month.  The  chief  difference  is 
that  grain  and  cotton  options  are  for  months,  not  days, 
and  one  may  buy  grain  or  cotton  in  March  to  be  de- 
livered, it  may  be,  the  following  December. 

In  the  Stock  Exchange  on  transactions  for  more  than 
three  days  written  contracts  are  exchanged  on  the  day 
following  the  transaction,  and  carry  interest  at  the  legal 
rate.  On  such  contracts  one  day's  notice  must  be  given, 
at  or  before  2.15  P.  M.,  before  the  securities  shall  be  de- 
liverable prior  to  the  maturity  of  the  contract.  Bids 
and  offers  of  cash,  regular,  at  three  days,  and  buyer's 
or  seller's  options  may  be  made  simultaneously,  as  be- 
ing essentially  different  propositions.  In  offers  to  buy 
on  seller's  option  or  to  sell  on  buyer's  option  the  longest 
option  has  precedence.  In  offers  to  buy  on  buyer's 
option  or  sell  on  seller's  option  the  shortest  option  has 
precedence.  No  other  bids  or  offers  have  any  standing 
on  the  floor.  No  sale  is  permitted  on  which  a  deposit 
shall  be  offered  as  to  limit  of  liability.  Brokers  carry 
stocks  for  their  customers  on  margins,  but  between  them- 
selves all  transactions  are  on  the  basis  of  full  payment 
on  delivery.* 

"Wash  Sales"  Prohibited. — No  fictitious  transactions 
are  permitted  on  the  floor  under  penalty  of  suspension 
for  not  more  than  one  year.  The  common  Street  name 

*  New  rules  covering  bids  and  offers  adopted  March  30,  1910 
(amended  May  12,  1911),  will  be  found  in  full  on  page  392  et  seq. 


148  WORK  OF  WALL  STREET 

for  fictitious  sales  is  "wash  sales."  When  two  brokers 
conspire  together  to  make  a  pretended  sale  of  a  stock 
in  order  to  give  it  a  fictitious  quotation,  that  is  "a  wash 
sale."  It  is  practicable,  however,  for  an  outside  opera- 
tor, by  using  different  brokers,  some  to  sell  and  others 
to  buy,  by  a  process  of  "matched  orders,"  as  they  are 
called,  to  give  a  fictitious  value  to  a  stock.  This  is,  in- 
deed, a  common  manipulative  device,  and  has  at  times 
been  carried  to  such  extremes  as  to  constitute  very 
plain  cases  of  fraud.  While  the  brokers  may  be  inno- 
cent tools  of  such  a  conspiracy,  it  has  been  argued  that 
the  Exchange  might  by  some  extension  of  its  rules  be 
able  to  reach  the  real  conspirators,  and  in  some  way  to 
prevent  the  evil.  The  Exchange  aims  at  making  every 
sale  represent  a  geriuine  transaction. 

The  constitution  provides  that  no  offers  to  buy  or  sell 
privileges  to  receive  or  deliver  securities  shall  be  made 
publicly  at  the  Exchange  under  a  penalty  of  $25  for 
each  offense.  By  "privileges"  are  meant  "puts," 
"calls,"  and  "spreads,"  Wall  Street  terms  for  a  sys- 
tem of  bets  on  the  future  prices  of  stocks,  and  betting 
is  not  permitted  on  the  Exchange.  Privileges,  however, 
may  be  dealt  in  outside  the  Board-Room,  in  which  case 
members  dealing  in  them  for  non-members  must  charge 
the  regular  commission  of  -J  of  1  per  cent. 

Comparisons. — When  the  broker  has  bought  or  sold 
in  the  Exchange,  he  reports  the  transaction  by  telephone 
to  his  office,  and  not  later  than  an  hour  after  the  close 
of  the  Exchange  the  seller  is  obliged  to  compare,  or 
endeavor  to  compare,  the  transaction  at  the  office  of 
the  buyer.  Formerly  comparisons  were  made  verbally, 
but  in  1891,  a  new  system  was  introduced,  and  now 
slips  or  tickets  are  exchanged.  No  comparison  or  fail- 
ure to  compare,  and  no  notification  or  acceptance  of 
notification,  shall  have  the  effect  of  creating  or  cancel- 


THE  NEW  YORK  STOCK  EXCHANGE  149 

ing  a  contract  or  changing  its  terms.  If  the  stocks  are 
to  be  cleared,  the  transaction  passes  through  a  system 
described  in  another  chapter. 

Deliveries. — Deliveries  of  securities  must  be  made  be- 
fore 2.15  P.  M.  on  the  same  day,  if  sold  for  cash,  or  on 
the  following  day,  if  sold  regular.  The  vast  majojrity 
of  sales  are  regular.  If  there  is  no  delivery  before  2.15 
the  contract  may  be  closed  out  "under  the  rule."  In 
this  case  immediate  notice  must  be  sent  to  .the  Chairman, 
who  will  read  it  from  the  rostrum,  and  will  publicly  buy 
in  the  stock  at  the  best  price  that  can  be  obtained.  If 
this  price  is  more  than  that  at  which  the  stock  should 
have  been  delivered,  the  buyer  has  a  claim  against  the 
seller  for  the  difference.  The  same  rule  applies  to  bor- 
rowed and  loaned  securities.  If  n<5  notice  of  failure  to 
deliver  is  given,  the  contract  continues  without  interest 
until  the  next  day.  When  the  transfer-books  of  any 
company  are  closed  by  a  legal  impediment,  deliveries 
of  stocks  on  contract  are  made  by  irrevocable  power  of 
attorney,  the  papers  to  be  satisfactory  to  the  recipient 
or  passed  upon  by  the  Committee  on  Securities. 

Assignments. — Definite  rules  have  been  established  by 
the  Exchange  to  govern  the  form  of  assignment  and 
powers  of  attorney  which  must  be  acknowledged  before 
a  notary  public.  Every  stock  certificate  carries  on  its 
face  the  name  of  the  person  to  whom  it  is  issued  and  the 
number  of  shares  he  owns.  If  the  holder  sells  the  stock, 
it  is  transferred  on  the  books  of  the  company  from  the 
name  of  the  former  owner  to  that  of  the  new,  and  a  new 
certificate  is  issued  to  the  latter,  but  it  can  also  be  trans- 
ferred by  an  assignment  on  the  back  of  the  certificate. 
Ultimately  the  buyer  will  have  the  stock  transferred  to 
his  own  name,  but  in  the  meantime  he  has  complete  evi- 
dence of  his  ownership.  It  is  prescribed  by  the  rules  of 
the  Exchange  that  the  signature  to  the  assignment  must 


150  WORK  OF  WALL  STREET 

be  technically  correct — that  is,  it  must  correspond  in 
every  respect  with  the  name  as  written  on  the  face  of 
the  certificate.  Even  such  prefixes  and  affixes  as  Judge, 
Doctor,  Rev.,  or  M.  D.  or  LL.  D.  must  appear  in  the  in- 
dorsement. Certificates  in  the  name  of  a  married 
woman  are  not  a  good  delivery  while  the  transfer-books 
are  open;  when  the  books  are  closed  a  joint  execution 
of  the  assignment  by  both  the  husband  and  wife  before 
a  notary  public  is  required.  An  indorsement  by  a  firm 
represented  in  the  Exchange  on  a  certificate  is  consid- 
ered a  guarantee  of  the  correctness  of  the  signature  of 
the  person  in  whose  name  the  stock  stands.  In  the  de- 
livery of  stock,  the  receiver  has  the  option  of  receiving 
by  certificate  and  powers  of  attorney  irrevocable  in  the 
name  of  and  guaranteed  by  a  member  of  or  firm  repre- 
sented in  the  Exchange,  or  by  transfer  thereof;  but  in 
all  cases  where  personal  liability  attaches  to  ownership, 
the  seller  has  the  right  to  deliver  by  actual  transfer  on 
the  books  of  the  company.  The  receiver  may,  in  all 
cases,  require  delivery  by  transfer  when  there  is  time 
to  make  it  and  the  books  are  open.  Certificates  in  the 
name  of  an  institution  or  in  the  name  of  one  of  its  offi- 
cers with  title  affixed  are  not  a  good  delivery  unless  as- 
signment is  acknowledged  before  a  notary.  Some  com- 
panies— as,  for  instance,  the  Western  Union  Telegraph 
and  the  American  Sugar  Refineries — require,  in  addition, 
a  certified  copy  of  the  resolutions  of  the  directors  of  the 
company  in  whose  name  the  stock  stands. 

Dividends. — Deliveries  should  be  made  in  lots  of  100 
shares  or  multiples  thereof,  and  in  the  case  of  bonds  in 
lots  of  $10,000  or  multiples  thereof.  Dividends  on 
stocks  are  paid,  of  course,  only  to  the  person  to  whom 
certificates  have  been  issued  and  whose  names  appear 
on  the  books.  As  soon  as  the  books  are  closed  all  trans- 
actions in  the  stocks  are  "ex-dividend."  The  buyer 


THE  NEW  YORK  STOCK  EXCHANGE  151 

does  not  receive  the  dividend,  as  his  name  can  not  be 
entered  on  the  books  after  they  have  been  closed.  The 
constitution  of  the  Exchange  provides  that  the  buyer  is 
entitled  to  receive  all  interests,  dividends,  rights  and 
privileges,  except  voting  power,  which  may  pertain  to 
the  securities  contracted  for,  and  for  which  the  trans- 
fer-books shall  be  closed  during  the  pendency  of  the 
contract,  and  the  seller  is  obliged  to  deliver  to  him  a  due 
bill  therefor  signed  or  indorsed  by  him.  But  when  a 
stock  is  sold,  ex-dividend,  it  is  sold  with  the  dividend 
off.  The  ex-dividend  quotation  of  a  stock  is  generally 
the  last  previous  price  less  the  amount  of  the  dividend. 
For  instance,  if  the  price  had  been  130,  and  the  books 
closed  for  a  dividend  of  1^,  the  next  quotation  would  be 
128|.  The  constitution  prohibits,  under  penalty  for  vio- 
lation, all  offers  to  buy  or  sell  dividends  publicly  at  the 
Exchange.  This,  however,  is  done  frequently  in  Wall 
Street.  It  is  in  the  nature  of  a  bet  on  the  amount  of  the 
coming  dividend.  For  instance,  there  may  be  much  dis- 
cussion whether  the  American  Sugar  Refineries  Com- 
pany's next  quarterly  dividend  will  be  If  per  cent,  or 
2  per  cent.  A  bull  on  the  stock  believes  that  the  divi- 
dend will  be  increased,  so  he  offers  If  for  the  next  divi- 
dend. If  the  company  declares  2  per  cent.,  he  makes 
the  difference  of  £  per  cent. ;  but  if  the  old  rate  is  de- 
clared, he  loses  what  he  has  paid  in  excess  of  the 
amount  declared. 

Short  Sales. — As  has  been  said,  there  is  a  place  in  the 
Exchange  where  stocks  may  be  loaned  and  borrowed. 
The  outsider  is  often  puzzled  by  this  class  of  transac- 
tions. Why,  he  may  ask,  does  any  one  desire  to  borrow 
stocks?  He  borrows  in  order  to  make  deliveries.  He 
is  under  contract  to  deliver,  say,  100  shares  of  Rock  Is- 
land. He  does  not  own  the  stock  and  so  he  borrows  it. 
But  why  should  he  sell  something  that  he  does  not  own? 
12 


152  WORK  OF  WALL  STREET 

This  question  opens  up  the  phenomena  of  "short"  sales. 
It  has  already  been  explained  that  a  bear  is  short  when 
he  has  sold  stock  that  he  does  not  own,  but  hopes  to  be 
able  to  buy  on  a  declining  market.  He  believes,  to  put 
a  suppositional  case,  that  the  stock  of  the  "Trans-Con- 
tinental" Company  is  selling  too  high.  It  is  paying  5 
per  cent,  a  year,  but  is  quoted  at  172  on  reports  that 
there  will  be  an  increase  to  6  per  cent.  The  bear  has  in- 
formation, or  thinks  he  has  information,  that  the  di- 
rectors will  maintain  the  old  rate,  so  he  begins  to  sell 
the  stock.  But  as  he  does  not  own  a  share,  and  as  de- 
liveries must  be  made  the  day  following  the  sale,  his 
broker  borrows  the  stock  for  him.  There  are  usually 
many  lenders,  for  it  is  cheaper  to  lend  the  stock  than  to 
carry  it  as  collateral  for  a  loan  at  a  bank.  The  lender 
of  a  stock  receives  its  full  market  value  in  cash.  His 
advantage  is  that  he  can  thus  receive  a  larger  sum  on 
the  stock  at  a  lower  rate  of  interest  than  he  could  by 
borrowing  money  on  it  at  the  bank,  and  at  the  same 
time  he  has  the  right  to  demand  return  of  the  stock  on 
repayment  of  the  sum  given  for  it.  Loans  of  stock  thus 
appear  on  their  face  the  same  as  sales,  and  are  subject 
to  the  same  rules  of  delivery  and  clearance.  The  bear 
who  is  short  thus  makes  delivery  of  the  stock  that  he 
has  sold  with  stock  that  he  has  borrowed.  Taking  up 
again  the  thread  of  the  suppositional  case,  let  it  be  un- 
derstood that  the  bear's  information  is  correct.  The 
old  rate  of  dividend  is  declared  and  the  price  of  the 
stock  declines  to  165.  Then  the  operator  orders  the 
broker  to  buy  the  stock  in  for  him.  This  is  accom- 
plished, the  loan  is  then  satisfied  by  the  delivery  to  the 
lender  of  the  stock  bought,  and  the  operator  has  made 
$7  a  share,  less  commissions  and  interest. 

As  a  rule,  only  professional  or  semi-professional  specu 
lators  operate  on  the  short  side.     Outsiders  almost  al- 


THE  NEW  YORK  STOCK  EXCHANGE  153 

ways  trade  on  the  long  side.  Indeed,  the  majority  of 
people  are  by  temperament  bulls.  Wall  Street  is  dis- 
tinguished from  most  other  markets  for  the  facilities  it 
affords  for  selling  what  one  does  not  possess.  Short 
selling  has  been  subject  to  much  criticism  in  that  its 
effect  is  to  depreciate  the  market  value  of  property.  It 
is  described  as  an  assault  on  values.  If  A  owns  200 
shares  of  stocks  valued  at  $20,000,  and  B  offers  to  sell 
the  same  at  $19,000,  he  has  depreciated  the  value  of  A's 
property  by  $1,000.  It  may  be  said  that  the  intrinsic 
value  is  unchanged.  But  if  A  seeks  to  borrow  money 
on  his  stock,  the  bank  will  assess  its  value  as  collateral 
on  the  basis  of  the  price  at  which  B  offers  to  sell,  and 
not  on  what  A  considers  it  to  be  worth.  Nevertheless, 
it  must  be  confessed  that  it  is  difficult  to  distinguish  any 
real  difference  in  the  nature  of  transactions  on  the  long 
and  the  short  side.  If  it  is  right  to  speculate  for  a  rise, 
it  is  right  to  speculate  for  a  fall.  The  bear  has  his  place 
in  the  market.  He  sometimes  performs  a  useful  office 
in  restoring  prices  to  their  proper  level.  Like  the  mi- 
nority in  Congress,  which  serves  as  a  check  on  the  ma- 
jority, the  bear  constitutes  a  check  on  undue  inflation  of 
prices.  The  subject  of  short  selling  is  treated  at  greater 
length  in  other  chapters. 

In  the  rules  of  the  Exchange  loans  of  stocks,  which  are 
a  part  of  the  machinery  of  short  selling,  are  treated  as 
regular  sales.  It  is  provided  that  notice  for  the  return 
of  securities  must  be  given  at  or  before  one  o'clock. 

.The  Exchange  maintains  a  Bond  Department,  with 
places  on  the  main  floor  for  bond  dealings,  and  the  trans- 
actions not  infrequently  exceed  $5,000,000  a  day,  and 
have  reached  much  greater  sums.  But  the  outside  sales 
of  bonds,  "over  the  counter,"  as  the  Street  phrase  is, 
are  larger,  and  call  for  the  services  of  a  distinct  class 
of  brokers -expert  in  investment  securities. 


154  WORK  OF  WALL  STREET 

Insolvencies. — The  business  of  a  stock-broker  is  prof- 
itable, but  extra-hazardous.  One  day  of  panic  like  that 
of  May  9,  1901,  may  wipe  out  the  profits  of  months  of 
active  trade.  Indeed,  at  one  time  on  that  day  it  is  be- 
lieved that  a  majority  of  the  brokerage  houses  were 
practically  insolvent,  and  but  for  the  speedy  relief  and 
rally  many  would  have  gone  under.  Nevertheless,  from 
1870  to  1902  there  were  only  631  Stock  Exchange  failures, 
an  average  of  20  a  year  during  that  period,  and  since 
then  the  average  of  failures  has  declined  owing  to  the 
greater  stability  of  business.  In  the  panic  of  1907  there 
were  few  Stock  Exchange  failures  as  compared  with  the 
record  of  the  panic  of  1873,  when  there  were  79.  In 
1893  there  were  13  insolvencies.  The  improvement  in 
the  mechanism  of  the  Exchange,  particularly  by  the  es- 
tablishment of  the  Stock  Clearing-House,  has  greatly 
reduced  the  risks  of  the  brokerage  business. 

The  Exchange  has  a  Committee  on  Insolvencies,  con- 
sisting of  three  members  of  the  Committee  on  Admis- 
sions, whose  duty  it  is  to  investigate  every  case  of  in- 
solvency immediately  after  its  announcement;  and 
should  it  ascertain  that  the  failure  is  caused  by  reckless 
or  unbusiness-like  dealings,  it  reports  the  same  to  the 
Committee  on  Admissions,  and  the  member  may  be  de- 
clared ineligible  for  reinstatement,  even  if  he  should  set- 
tle with  his  creditors.  There  have  been  a  number  of 
cases  in  which  reinstatement  has  been  refused  for  this 
reason.  A  member  in  applying  for  reinstatement  is 
obliged  to  give  a  list  of  his  creditors,  a  statement  of  the 
amounts  of  the  original  liabilities,  and  the  nature  of 
settlement  in  each  case.  When  a  member  fails,  his  out- 
standing contracts  are  fulfilled  by  buying  in  or  selling 
out  under  the  rule  of  the  Exchange. 

Holidays. — The  Exchange  is  closed  on  Sundays  and 
all  holidays,  and  it  often  voluntarily  closes  its  doors  on 


THE  NEW  YORK  STOCK  EXCHANGE  155 

Good  Friday  and  on  such  special  occasions  as  the  funeral 
of  the  President  of  the  United  States  or  the  celebration 
of  a  national  event.  Business  on  Saturdays  ends  at  noon. 
All  contracts  due  on  Sundays  and  other  holidays  are 
settled  on  the  preceding  day.  On  Saturday  all  con- 
tracts in  the  regular  way,  and  loans  of  stocks  and 
money  made  Friday,  are  settled  on  Monday,  and  other 
contracts  and  loans  of  stocks  and  money  falling  due  on 
Saturday  are  settled  the  day  previous. 

Governing  Committee. — The  government  of  the  Ex- 
change is  vested  in  the  Governing  Committee,  consisting 
of  a  President  and  Treasurer,  elected  annually,  and  of 
40  members  chosen  for  terms  of  four  years.  They  are 
divided  in  classes,  so  that  10  are  elected  every  year. 
This  committee  has  supreme  authority.  Its  decision  on 
all  matters  is  final.  Before  the  consolidation  in  1869, 
every  matter  of  business  was  put  to  a  vote  of  the  mem- 
bers of  the  Exchange,  but  the  present  system  has  worked 
far  better.  It  is  substantially  the  same  as  that  of  the 
directors  of  a  corporation.  The  governors  are  divided 
into  a  number  of  subcommittees,  which  have  supervision 
over  the  different  parts  of  the  machinery  of  the  Exchange. 
There  are  committees  on  arrangements,  admissions,  arbi- 
tration, commissions,  constitution,  finance,  law,  securi- 
ties, stock  list,  and  the  Clearing-House.  Governors  are 
paid  a  small  directors'  fee  for  every  meeting  they  at- 
tend, but  the  service  they  perform  is  really  one  of  love. 
Men  who  could  command  high  salaries  as  officers  of  cor- 
porations practically  give  their  abilities  and  a  large 
share  of  their  time  to  the  proper  administration  of  the 
affairs  of  the  institution.  The  Arbitration  Committee 
settles  without  resort  to  litigation  differences  between 
members,  and  also  between  members  and  non-members 
when  the  latter  will  agree  to  abide  by  the  result. 

To  be  President  of  the  Exchange  is  considered  a  high 


156  WORK  OF  WALL  STREET 

distinction.  Since  1817  over  forty  men  have  held  the  of- 
fice, among  the  more  noted  being  John  Ward,  H.  G.  Steb- 
bins,  Charles  R.  Marvin,  W.  R.  Vermilye,  William  Alex- 
ander Smith,  Edward  King,  Brayton  Ives,  Donald 
Mackay,  J.  Edward  Simmons,  Francis  L.  Eames,  Rudolph 
Keppler,  and  Ransom  H.  Thomas,  who  holds  the  record 
for  length  of  service.  There  have  been  only  seven  secre- 
taries in  eighty-five  years.  The  Exchange  has  also  a 
Chairman  whose  duties  have  been  explained.  This  offi- 
cial receives  a  salary;  he  is  a  member  of  the  Exchange, 
but  not  of  the  Governing  Committee. 

The  Exchange  Building. — The  new  building  of  the 
Stock  Exchange  stands  in  Broad,  New,  and  Wall  Streets, 
on  the  site  of  the  old  building  and  that  of  adjoining  prop- 
erty bought  SQ  as  to  increase  the  size  of  the  Board-Room, 
and  provide  other  facilities  for  an  enlarged  business. 
The  building,  constructed  of  a  high  grade  of  Georgia 
marble,  and  distinguished  by  rows  of  fine  Corinthian 
columns,  is  admirable  in  exterior  architecture  and  in- 
terior conveniences.  The  Board-Room  is  a  superb  apart- 
ment, 138  feet  long  by  112  feet  wide,  and  has  a  height 
of  80  feet.  It  extends  from  Broad  Street  to  New,  and 
contains  many  novelties  for  lighting,  heating,  ventila- 
tion, and  the  transaction  of  business.  It  is  claimed  for 
it  that  this  is  the  most  complete  Stock  Exchange  in  the 
world,  a  veritable  palace  of  investment  and  speculation. 

In  the  basement  are  built  great  steel  vaults  containing 
hundreds  of  safe  deposit  boxes  or  safes  for  the  security 
of  stocks  and  bonds  held  by  the  members.  It  is  one  of 
the  picturesque  sights  of  Broad  and  Wall  Streets  after 
3  o'clock  to  see  the  brokers  carrying  their  securities 
to  these  vaults.  First  will  come  two  clerks  carrying  a 
box  containing  the  valuable  papers.  Then  follows 
closely  a  member  of  the  firm  who  keeps  an  eye  on  the 
box  and  deposits  it  in  his  safe.  Millions  upon  millions 


THE  NEW  YORK  STOCK  EXCHANGE  157 

of  dollars'  worth  of  securities  are  thus  carried  through 
the  streets  of  the  financial  district  every  business  day. 

Comparison  with  London  System. — It  is  but  natural  to 
inquire  how  the  mechanism  of  the  New  York  Stock  Ex- 
change compares  with  that  of  the  London  Exchange. 
There  is  really  no  comparison;  there  is  a  contrast.*  In 
everything  except  international  scope  of  operations, 
the  New  York  Exchange  has  the  advantage.  To  Ameri- 
cans the  London  system  seems  antiquated  and  clumsy, 
but  Mr.  F.  W.  Hirst  tells  us  that  the  London  division 
of  functions  into  jobbers  and  brokers  makes  for  a  free 
market  and  close  prices,  and  he  claims  that  there  is  no 
other  place  in  the  world  where  good  stocks  are  more 
easily  and  quickly  realized  at  a  minimum  of  loss  or  pur- 
chasable, so  near  the  market  price,  as  on  the  London 
Stock  Exchange. 

In  London,  there  are  clearances,  but  they  are  made 
every  two  weeks,  not  daily  as  in  New  York.  Stocks  are 
admitted  to  dealings,  but  under  different  scrutiny  and 
regulations  than  prevail  in  New  York.  Then,  in  London, 
there  is  a  dual  system  of  jobbers  and  brokers,  that  seems 
incomprehensible  to  Americans  accustomed  to  direct 
dealings  between  principals  and  agents.  As  in  the  ad- 
ministration of  English  law  courts,  there  are  distinct 
classes  of  counselors  and  attorneys,  so  in  the  London 
Stock  Exchange,  there  are  brokers  who  represent  cus- 
tomers, but  who  must  do  all  their  trading  through  job- 
bers, who  have  no  dealings  with  the  public,  but  trade 
among  themselves  and  with  brokers.  The  jobbers  are 


*  "As  the  eagerness  and  passion  of  New  York  leave  European 
stock-markets  far  behind,  for  what  the  Paris  and  London  Exchanges 
are  at  rare  moments,  Wall  Street  is  for  weeks,  or  perhaps,  with  a 
few  intermissions,  for  months  together,  so  the  operations  of  Wall 
Street  are  vaster,  more  boldly  conceived,  executed  with  a  steadier 
precision  than  those  of  European  speculators." 

JAMES  BRYCE  in  "American  Commonwealth." 


158  WORK  OF  WALL  STREET 

the  wholesalers,  and  the  brokers  the  retailers.  In  New 
York,  a  customer  may  give  his  order  in  a  broker's  office 
and  have  it  executed  in  the  Exchange  possibly  in  two  or 
three  minutes,  and  the  record  of  it  reported  on  the  tape 
a  minute  later;  but  business  in  London  goes  through  a 
system  of  circumlocution  and  delay  quite  characteristic 
of  English  conservatism  and  antagonism  to  haste.  No 
record  of  sales  is  made,  and  while  there  are  stock  "tick- 
ers," there  was  much  opposition  to  their  introduction, 
and  even  now  they  record  only  prices,  and  not  sales. 

The  London  Exchange  in  1910  contained  5,019  mem- 
bers, besides  a  great  number  of  clerks.  The  latter 
serve  four  years  of  apprenticeship,  when  they  may  be- 
come members  on  payment  of  an  entrance  fee  of  250 
guineas.  Others  than  clerks  may  join  on  a  payment  of 
double  that  amount.  Members  are  re-elected  every 
year.  The  Exchange  is  governed  by  a  dual  system  of 
administration,  very  different  from  that  of  New  York.  It 
is  controlled  by  a  stock  company  commonly  called  the 
"House,"  having  £240,000  capital  divided  into  20,000 
shares.  Only  members  can  be  permanent  holders  of  the 
stock,  and  every  member  must  own  at  least  one  share. 
Nine  managers,  elected  by  the  shareholders,  appoint  most 
of  the  officers  of  the  Exchange  and  fix  the  charges  for 
admission  of  new  members.  The  new  members  of  the 
Exchange  are  represented  by  a  committee  of  three  which 
administers  the  rules,  adjudicates  complaints  and  main- 
tains the  inviolability  of  contracts. 

Arbitrage. — Since  the  introduction  of  the  cable  there 
have  been  opportunities  for  what  are  called  "arbitrage" 
dealings  between  the  New  York  and  London  stock-mar- 
kets. Instantaneous  quotations  are  exchanged  between 
New  York  and  London,  but  as  there  is  generally  a  dif- 
ference in  the  prices,  an  active  broker  may,  through  his 
representative  abroad,  be  able  to  buy  in  one  market  and 


THE  NEW  YORK  STOCK  EXCHANGE  159 

sell  in  another  at  the  same  time  and  clear  a  profit.  In 
an  arbitrage  transaction,  the  ocean  has  to  be  crossed 
twice  by  a  cablegram  passing  through  the  hands  of  three 
operators,  but  this  takes  only  about  four  minutes,  and 
has  been  done  in  less  time.  The  difference  in  time  be- 
tween London  and  New  York  is  four  minutes  and  one 
second  less  than  five  hours.  As  the  New  York  Exchange 
opens  at  10  A.  M.,  it  is  then  four  minutes  of  three  o'clock 
in  the  afternoon  in  London,  and  by  two  minutes  after 
three  the  full  New  York  opening  prices  are  known  in 
London,  only  the  six  minutes  being  required  to  make 
the  sales  in  New  York,  to  gather  the  quotations,  to  put 
them  into  the  hands  of  the  telegraph  operator,  to  trans- 
mit them  to  London  and  to  publish  them  there. 

The  hour  of  closing  business  in  the  London  Exchange 
is  at  three  o'clock,  but  the  trading  goes  on  until  four 
and  on  the  curb  much  later.  The  London  two  o'clock 
quotations  are  received  in  Wall  Street  shortly  after  9 
A.  M.  London  can  trade  by  cable  in  American  stocks 
during  all  the  time  the  New  York  Exchange  is  open,  as 
when  it  closes  it  is  only  eight  o'clock  in  London.  The 
London  orders  executed  in  New  York  are  often  large. 
They  have  amounted  to  as  many  as  100,000  shares  and 
over  in  one  day,  and  they  are  sometimes  an  important 
factor  in  the  market.  There  was  formerly  a  large  ar- 
bitrage business  between  New  York  and  other  American 
cities,  but  this  has  been  reduced  to  a  small  figure  by  the 
act,  in  1898,  of  the  New  York  Exchange,  which,  believing 
that  this  trading  as  carried  on  was  detrimental  to  its  in- 
terests because  it  resulted  in  practically  ignoring  the 
commission  law,  took  measures  to  stop  it. 

Dissemination  of  News. — Experts  say  that  it  takes  an 
item  of  unexpected  outside  news  about  fifteen  to  thirty 
minutes  to  make  itself  felt  in  the  New  York  Stock  Ex- 
change, and  it  takes  about  as  short  a  time  for  news  origi- 


160  WORK  OF  WALL  STREET 

nating  on  the  floor  of  the  Exchange  to  reach  the  "tick- 
ers" outside. 

"How's  London?" — The  following  is  abridged  from 
an  excellent  statement  by  "W.  P.  Hamilton  of  The  Wall 
Street  Journal  of  the  way  London  quotations  are  received 
in  New  York : 

The  first  question  anybody  puts  to  anybody  else,  on 
arrival  at  his  Wall  Street  office  at  9 :30  or  so  in  the  morn- 
ing, is,  "How's  London?"  The  London  quotations  are 
the  first  real  lead  on  our  market.  They  to  some  extent 
indicate  what  will  be  the  popular  view  of  the  news 
which  has  developed  over  night.  There  are  times  when 
the  London  view  is  immaterial.  It  is  even  often  entirely 
at  variance  with  that  taken  in  this  market.  But  when 
stocks  are  really  active  it  is  always  important,  and  the 
London  quotations  are  indispensable  to  any  forecast  of 
our  day's  trading. 

A  few  minutes  before  2  P.  M.,  London  time,  the  quota- 
tions for  American  stocks  in  the  London  market  are  ob- 
tained for  transmission  to  New  York.  It  takes,  perhaps, 
eight  minutes  to  collect  these  prices  and  transmit  them 
in  code  form.  The  presses  in  New  York  are  waiting. 
The  code  is  rapidly  translated.  The  equivalent  is  calcu- 
lated at  the  ruling  rate  of  demand  sterling,  and  in 
twenty  minutes  from  the  receipt  of  the  cable  the  quo- 
tations are  being  read  in  the  brokers'  offices. 

London  deals  in  American  stocks  at  a  fixed  rate  of 
$5  for  the  pound  sterling.  The  reason  for  this  is  that 
the  rate  of  exchange  is  constantly  changing.  If  the  real 
quotation  were  taken  for  transactions  there  would  be  a 
continual  dispute  as  to  what  the  rate  was  at  the  time 
the  bargain  was  made.  A  fixed  figure  makes  no  differ- 
ence to  the  trader  in  London  who  buys  and  sells  at  the 
same  conventional  rate.  "We,  however,  cannot  afford  to 
give  more  than  the  rate  of  exchange  for  the  sovereign. 


THE  NEW  YORK  STOCK  EXCHANGE  161 

Therefore,  to  get  the  difference  between  the  London 
price  and  what  the  price  of  the  stock  would  actually  be 
here,  we  deduct  the  rate  of  exchange,  say,  $4.87^,  from 
the  conventional  $5.  It  is  obvious  that  if  .a  stock  is  50 
in  London,  it  is  48.75,  or  48£,  at  the  parity  here. 

There  are  difficulties  in  connection  with  the  collection 
of  prices  in  London  which  people  used  to  New  York 
Stock  Exchange  methods  do  not  appreciate.  Actual 
sales  are  not  recorded  there.  The  prices  at  which  a  few 
transactions  have  been  made  are  marked  on  the  official 
list,  but  there  is  no  means  of  telling  whether  the  market 
has  dealt  in  5,000  shares  or  500,000  during  the  day. 
The  London  ticker  only  quotes  bid-and-asked  prices,  and 
never  records  the  price  at  which  any  particular  transac- 
tion was  done. 

Under  the  rules  of  the  London  Stock  Exchange,  the 
quotation  of  a  price  by  one  member  to  another  binds  the 
member  who  quotes  to  buy  100  shares  at  his  bid  price, 
or  sell  100  shares  at  his  asked  price,  if  the  other  mem- 
ber chooses  to  trade.  This  has  the  effect  of  securing  a 
really  close  bid-and-asked  price.  It  is  also  the  reason 
why  an  arbitrage  house  will  know  the  London  market 
price  better  than  any  news  agency  can. 

The  London  system  has  its  advantages  and  its  disad- 
vantages. In  our  market  the  jobber's  turn  is  saved, 
but,  in  an  excited  and  feverish  market,  the  broker  may 
be  hours  before  he  can  trade  at  all.  In  London  he  is 
always  sure  at  being  able  to  sell  at  some  price  or  buy  at 
some  price — both  very  important  conditions  in  a  panicky 
market,  when  it  often  happens  here  that  the  broker  had 
to  offer  the  stock  down  indefinitely  until  he  finds  a  pur- 
chaser. In  the  May  panic  of  1901  Jersey  Central  was 
offered  down  here  from  153  to  102  without  a  single  trans- 
action. The  stock  was  sold  at  102  and  the  next  transac- 
tion was  148.  This  would  have  been  impossible  in  Lon- 


162  WORK  OF  WALL  STREET 

don.  The  jobber  might  have  made  a  very  wide  price, 
but  the  broker  would  have  been  able  to  sell  for  his  cus- 
tomer at  worst  within  five  points  of  the  previous  quota- 
tion. 

REFERENCES 

"The  New  York  Stock  Exchange,"  Francis  L.  Eames,  1894. 

"The  Stock  Exchanges  of  London,  Paris  and  New  York,"  George 

R.  Gibson,  1889. 
"The  Stock   Exchange"    (London  and  New  York),   F.   W.   Hirst, 

1911. 
"History   and   Methods   of   the  Paris   Bourse,"   E.   Vidal,   United 

States  Senate  Document  573,  1911. 

"The  Stock  Exchange  and  Its  Machinery,"  R.  W.  Babson. 
"The  New  York  Stock  Exchange,"  M.  King,  1904. 
"Treatise  on  the  Laws  of  the  Stock   Exchange,"    Schwabe  and 

Bronson. 

"Rules  and  Usages  of  the  Stock  Exchange"  (London),  1901. 
"Treatise  on  the  Law  of  Stock  Brokers  and  Stock  Exchanges," 

John  R.  Dos  Passes,  1905. 


CHAPTER  XI 
NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE 

The  growth  of  the  stock-market  is  limited  only  by  the 
ability  of  the  money-market  to  supply  the  necessary 
banking  accommodations.  No  active  broker,  unless  pos- 
sessed of  immense  resources,  could  transact  a  large  busi- 
ness without  the  temporary  credit  extended  to  him  by 
his  bank  through  certification  of  his  checks.  There 
is  a  limit  to  the  ability  and  willingness  of  the  banks  to 
extend  the  benefit  of  such  certification. 

That  limit  seemed  to  be  reached  in  1892,  when  the 
banks,  alarmed  by  the  large  certifications  required  by 
the  brokers,  threatened  action,  which  finally  forced  the 
Stock  Exchange  to  adopt  a  system  that  would  reduce 
the  volume  of  required  certification.  The  result  is  the 
Stock  Clearing-House  of  the  New  York  Stock  Exchange. 
For  many  years  there  had  been  agitation  in  favor  of 
stock  clearances.  As  early  as  1857,  only  four  years  after 
the  establishment  of  the  Bank  Clearing-House,  it  was 
proposed  to  extend  the  same  system  to  stocks.  During 
the  period  of  the  exciting  speculation  in  gold  after  the 
war,  transactions  in  gold  were  cleared  with  success 
through  the  New  York  Gold  Exchange  Bank,  although 
the  system  did  not  commend  itself  as  one  adapted  to 
stocks.  The  first  stock  clearing  system  was  successfully 
established  in  Frankfort  in  1867,  and  was  speedily 
adopted  by  Berlin,  Hamburg,  Vienna,  and  London.  At 
various  periods  attempts  were  made  to  found  a  Stock 
Clearing-House  in  New  York,  but  they  all  ended  in  fail- 
ure. In  1883,  Controller  of  the  Currency  John  J.  Knox 
called  attention  to  the  London  Stock  Clearing-House, 

163 


164  WORK  OF  WALL  STREET 

and  suggested  the  adoption  of  a  similar  system  as  the 
means  of  reducing  the  evil  of  overcertification. 

In  1892  R.  L.  Edwards,  President  of  the  Bank  of  the 
State  of  New  York,  which  did  a  heavy  business  with 
brokers,  wrote  to  the  president  of  the  Exchange  stating 
that  there  would  be  a  probable  curtailment  of  certifica- 
tion unless  something  was  done.  Then,  mainly  through 
the  labor  of  Francis  L.  Eames,  the  present  stock  clear- 
ing system  was  adopted  and  went  into  effect  on  May 
17th,  the  one  hundredth  anniversary  of  the  broker's 
agreement  of  1792,  out  of  which  the  Stock  Exchange 
grew. 

For  many  years  the  Philadelphia  Stock  Exchange  had 
had  such  a  system  in  successful  operation,  and  the  Boston 
Exchange  had  recently  adopted  it.  In  European  cities, 
as  has  been  stated,  clearances  had  long  been  in  opera- 
tion. But  the  European  system  was  and  still  is  based  on 
fortnightly  settlements,  and  the  New  York  Exchange, 
long  accustomed  to  daily  deliveries  of  stock,  preferred 
a  system  of  daily  clearances.  Although  late  in  adopting 
this  clearance  system,  the  New  York  Stock  Exchange 
has  succeeded  in  establishing  one  which,  for  the  extent 
of  its  transactions  and  its  adaptibility  to  the  growing 
business  of  the  country,  has  no  equal  anywhere. 

If  this  Exchange  [wrote  the  Special  Committee  of  the  Ex- 
change in  1892  in  recommending  clearances]  is  to  take  the  proper 
place  in  the  future  among  the  stock-markets  of  the  world,  a  sys- 
tem of  doing  business  will  be  required  which  will  stand  the 
strain  of  a  volume  of  business  larger  than  any  heretofore  known. 
Our  present  system  of  actual  payment  of  entire  value  in  every 
transaction  blocks  up  in  active  times  both  banks  and  offices  to  an 
intolerable  extent,  and  is  an  obstacle  to  the  growth  of  the  busi- 
ness commensurate  with  the  growth  of  the  country.  For  causes 
well  understood,  the  banking  facilities  for  this  business  have  not 
increased  during  recent  years.  A  proper  system  of  clearing  by 
largely  reducing  the  volume  of  checks  and  deliveries  would  re- 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE       165 

lieve  both  offices  and  banks  of  much  of  the  confusion  and  risk 
with  which  we  are  so  familiar. 

Legality. — Speaking  of  the  legality  of  clearances,  the 
report  said: 

The  laws  of  this  State  require  in  all  contracts  an  intent  to 
deliver.  At  the  present  day,  on  the  various  exchanges,  trans- 
actions in  securities  and  agricultural  products  have  reached  such 
magnitude,  that  to  pass  the  actual  property  or  warehouse  receipt 
or  the  certificate  of  stock  into  the  hands  of  each  party  to  every 
contract  is  impossible.  The  business  of  the  world  is  now  too 
large  to  be  transacted  in  that  way.  Contracts  on  which  the 
actual  delivery  of  the  property  can  be  enforced  if  desired  make 
the  markets  of  the  world. 

The  report  states  that  the  courts  have  held  that  such 
contracts  show  the  required  intent  to  deliver  and  are 
thus  legal. 

The  Stock  Exchange  Clearing-House  has  fulfilled  every 
prediction  made  in  this  report.  "Writing  in  1894,  two 
years  after  its  establishment,  Mr.  Eames  said  that  "dur- 
ing the  panic  of  1893  failures  on  the  Stock  Exchange 
would  have  been  vastly  more  numerous  had  there  been 
no  clearing  system  in  operation."  So  in  the  unequaled 
speculation  of  1901,  the  clearing  system  proved  more 
than  adequate  to  every  demand  upon  it.  As  a  matter 
of  fact,  it  has  expanded  to  an  almost  unlimited  degree 
the  capacity  of  the  stock-market.  "With  its  aid  the 
mechanism  of  "Wall  Street  appears  powerful  enough  to 
conduct  easily  and  well  all  the  possible  operations  of 
the  future.  The  importance  of  the  Clearing-House  can 
therefore  be  scarcely  overestimated. 

It  is  conceded  that  it  would  have  been  impossible  to 
have  transacted  the  stock  business  of  1901  ex-Clearing- 
House.  The  machinery  of  the  Street  would  have  broken 
down.  Even  on-  the  panic  day  of  May  9,  1901,  when 
the  total  sales  of  stocks  were  3,336,695  shares,  and  when 


166 


WORK  OF  WALL  STREET 


the  Street  was  convulsed  by  the  tremendous  fall  in 
prices,  there  was  no  failure  of  the  Clearing-House  sys- 
tem. Transactions  of  the  9th  were  cleared  as  usual  on 
the  10th,  with  the  following  result: 

Shares  cleared  both  sides,  including  balances 12,131,600 

Total  value  both  sides,  contracts  and  balances,  .$961,300,000 

Share  balances  one  side   1,714,800 

Value  share  balances  one  side   $129,800,000 

Cash  balances,  one  side  $5,461,700 

Number  of  parties  clearing 452 

Banks  certification  obviated $221,050,000 

On  the  same  day  the  transactions  of  the  Bank  Clear- 
ing-House  (the  heaviest  on  record  up  to  that  time)  were 
$622,410,525,  or  nearly  $339,000,000  less. 

The  Stock  Clearing-House,  however,  has  done  a  larger 
business  even  than  that  of  May  10th.  Inasmuch  as  there 
are  no  clearances  dated  on  Saturday,  the  clearances  of 
May  6th,  1901,  represented  two  days'  transactions.  On 
that  day  the  shares  cleared  both  sides  amounted  to 
13,313,800,  having  a  value  of  $1,132,200,000.  Over  one 
billion  dollars  in  one  day!  The  bank  certifications  ob- 
viated amounted  to  $286,100,000. 

The  statistics  for  the  two  years  1893  and  1901  are  of 
interest  as  summing  up  the  operation  of  the  system  in 
periods  of  panic  and  boom. 


1893. 

1901. 

Shares    cleared    both   sides,    in- 
cluding  balances    

256,335  400 

926  347  300 

Total  value  both  sides,  contracts 
and    balances    

$16,169,800  000 

$77  853  500  000 

Share  balances  one  side   

24,742,700 

134  391  000 

Value  share  balances  one  side.  . 
Cash  balances  one  side   

$1,470.700.000 
$33,116,400 

$10,930.853,000 
$116849300 

Certification    required    

$1,470700000 

$10  930  853  600 

Certification    obviated    

$5,143  300  000 

$17  065042  800 

Certification    that    would    have 
been    required   without   clear- 
ances   . 

$6.614.200.000 

$27.995.896.400 

NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE        167 

These  sums  are  so  great  as  to  be  beyond  human  com- 
prehension. The  highest  monthly  total  of  stock  clear- 
ances in  London  was,  in  July,  1901,  £875,728,000.  The 
average  daily  saving  to  the  banks  in  New  York  in  certifi- 
cations amounts  to  more  than  $50,000,000. 

Capacity. — The  Stock  Clearing-House  is  capable  of  in- 
definite expansion;  there  seems  to  be  no  limit  to  the 
amount  of  business  it  could  do.  It  has  handled  about 
100,000  items  in  one  day.  One  broker  alone  has  turned 
in  about  1,300  items.  If  the  other  490  firms  did  the  same 
there  would  be  637,000  items  in  one  day.  It  follows, 
therefore,  that  the  Clearing-House  can  handle  at  least 
six  times  its  business  in  1901,  and  that  is  an  under- 
estimate. 

Through  its  operation  65  per  cent,  of  all  the  shares 
dealt  in  are  eliminated  in  deliveries,  and  more  than  90 
per  cent,  of  the  number  of  checks  is  done  away  with. 
At  the  time  this  was  written  87  stocks  were  regularly 
cleared,  these  representing  over  85  per  cent,  of  the  total 
sales  of  the  Exchange.  All  sales  in  these  stocks  are 
cleared,  except  at  the  time  they  are  made  it  is  expressly 
stipulated  that  they  shall  be  ex-Clearing-House. 

Simplicity  of  System. — The  operation  of  clearing  is 
simplicity  itself.  A  sells  100  shares  of  Atchison  to  B, 
who  likewise  sells  100  shares  of  the  same  stock  to  C. 
Now,  instead  of  A  delivering  the  stock  of  B,  and  then 
B  delivering  it  to  C,  which  was  the  method  of  business 
before  the  Clearing-House  was  established,  A,  under  the 
new  system,  delivers  the  stock  directly  to  C. 

This  operation  is  precisely  the  same  as  that  which 
forms  the  basis  of  foreign  exchange.  But  in  stock  clear- 
ances the  balances  are  settled  in  both  stocks  and  money. 
This  duality  of  settlement  is  what  makes  the  stock  clear- 
ing system  so  puzzling  to  those  not  instructed  in  its 
methods.  In  reality  the  system  is  not  at  all  compli- 
13 


168  WORK  OF  WALL  STREET 

cated.  The  reason  for  the  double  settlement  may  be 
easily  reasoned  out.  In  the  example  given,  A  must  de- 
liver to  C  stock  he  has  sold  to  B,  but  the  price  at  which 
he  has  sold  to  B  may  be  different  from  that  at  which 
C  bought  of  B.  Consequently  there  must  be  a  settle- 
ment price  established,  so  that  clearances  may  be  made 
equitably.  It  follows  that  there  must  also  be  a  cash 
settlement  to  make  up  the  difference  between  the  con- 
tract or  purchase  price  and  the  settlement  price.  This 
may  be  made  clearer  by  two  simple  illustrations. 

A  sells  100  shares  of  Atchison  at  75  to  B,  who  sells 
the  same  amount  to  C  at  76.  The  clearance  then  pro- 
ceeds as  follows:  A  is  directed  to  deliver  the  stock  to 
C,  who  pays  him  76  for  it.  But  as  A  sold  to  B  at  75, 
he  gets  $1  a  share,  or  $100  for  the  100  shares,  more 
than  is  due  him.  So  A  draws  his  check  for  $100  to  the 
order  of  the  Clearing-House  and  delivers  it  with  his 
clearance  sheet.  C  having  got  his  stock  at  the  price 
he  contracted  to  pay  for  it,  is  satisfied.  B  having  bought 
at  75  and  sold  at  76,  has  no  delivery  of  stock  to  make, 
but  he  has  a  profit  of  $100  coming  to  him,  so  he  draws 
a  draft  on  the  Clearing-House  for  that  amount.  What 
is  the  result?  A  gets  76  for  the  stock  he  has  sold  minus 
$100  paid  to  the  Clearing-House.  C  gets  the  stock  at 
the  price  he  has  contracted  for,  and  B,  who  both  bought 
and  sold,  gets  his  profit  of  $100.  The  Clearing-House 
having  received  $100  from  A,  has  paid  the  same  amount 
to  B. 

In  Clearing-House  transactions  the  firm  that  buys  and 
sells  the  same  stock  clears  the  transaction  on  its  own 
sheet,  drawing  on  the  Clearing-House  for  the  amount  of 
the  profit,  or  paying  to  the  Clearing-House  the  amount 
of  the  loss,  as  the  case  may  be.  But  when  the  firm 
delivers  its  stock  it  delivers  at  a  fixed  delivery  price, 
and  must  credit  or  debit  itself  for  the  difference  between 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE       169 

the  delivery  and  the  contract  price.  In  other  words, 
the  delivery  price  applies  only  to  stock  balances  that 
must  be  delivered. 

To  make  the  operation  clearer  another  illustration 
must  be  given.  A  sells  to  B  200  shares  of  Atchison  at 
75.  B  sells  200  shares  of  Atchison  to  C  at  76,  and  200 
shares  of  Union  Pacific  at  100.  C  sells  A  100  shares  of 
Union  Pacific  at  101.  The  delivery  or  settlement  price 
of  Atchison  is  77,  and  of  Union  Pacific  99.  The  clear- 
ance will  then  proceed  as  follows:  A  delivers  200 
Atchison  to  C;  B  delivers  100  Union  Pacific  to  A  and 
100  to  C.  C  has  no  delivery,  but  receives  100  Union 
Pacific  from  B  and  200  Atchison  from  A.  As  A,  under 
the  delivery  price  of  77,  receives  $400  more  for  the  200 
Atchison  than  the  selling  price  of  75,  and  will  pay  99, 
or  $200,  less  for  100  Union  Pacific  than  the  contract 
price  of  101,  he  is  a  debtor  of  the  Clearing-House  for 
$600.  B  clears  200  Atchison  at  $200  profit,  the  differ- 
ence between  the  contract  purchase  price  of  75  and  the 
contract  selling  price  of  76.  But  in  delivering  200  Union 
Pacific  to  A  and  C  at  the  delivery  price  of  99,  he  gets 
$200  less  than  under  the  contract  selling  price  of  100. 
So  B  is  a  creditor  of  the  Clearing-House  for  $400.  C 
clears  100  shares  of  Union  Pacific  at  a  profit  of  $100, 
the  difference  between  the  contract  purchase  price  of 
100  and  the  contract  selling  price  of  101,  but  he  pays 
$100  less  for  the  100  Union  Pacific  he  will  receive  from 
B  under  the  delivery  price  of  99  than  he  contracted  to 
pay,  so  these  two  items  balance  each  other.  C  pays, 
under  the  delivery  price  of  77,  $200  more  for  his  Atchi- 
son than  the  contract  price  of  76,  and  has  therefore  a 
credit  of  $200  at  the  Clearing-House.  The  Clearing- 
House  would  receive  $600  from  A,  and  pay  $400  to  B 
and  $200  to  C,  and  the  deliveries  of  balances  of  stocks 
would  then  proceed  as  already  indicated. 


170  WORK  OF  WALL  STREET 

This  illustration  shows  the  process  of  clearance  and 
the  difference  between  contract  and  delivery  prices,  but 
inadequately  indicates  the  advantages  of  the  Cleariug- 
House  in  reducing  deliveries  and  obviating  certifications. 
The  operation  of  clearance  looks  simple  when  reduced 
to  this  alphabetical  form,  but  when  the  operations  of 
nearly  500  firms,  each  making  many  purchases  and  sales 
every  day,  are  to  be  cleared,  the  system,  while  precisely 
the  same,  is  working  on  so  large  a  scale  and  in  so  many 
different  stocks  that  it  is  not  surprising  that  the  out- 
sider, in  trying  to  understand  it,  gets  lost  in  the  maze 
of  stock  deliveries  and  cash  settlements.  In  the  practi- 
cal working  of  the  system,  however,  there  is  nothing  in- 
volved or  uncertain;  never  once  has  the  machinery 
broken  down  or  become  clogged.  In  panic  and  in  boom 
it  has  worked  with  precision,  accuracy,  and  secrecy. 

Description. — For  the  sake  of  an  illustration  it  is  nec- 
essary to  go  through  the  forms  of  an  actual  clearance.* 
The  firm  of  Wilson,  Morgan  &  Company,  of  45  "Wall 
Street,  has  through  its  Board  member,  Mr.  Morgan, 
bought  or  borrowed  1,500  shares  of  Steel,  preferred,  at 
varying  prices  from  eight  different  firms,  700  shares  of 
Atchison  from  one  firm  and  700  of  Union  Pacific,  pre- 
ferred, from  another.  On  the  same  day  it  has  sold  or 
loaned  700  shares  of  Atchison  to  one  firm,  1,000  shares 
of  Union  Pacific,  preferred,  to  five  firms,  and  1,300  shares 
of  Steel,  preferred,  to  one  firm.  This  was  not  a  very 
large  day's  business,  but  it  is  better  for  the  purposes 
of  illustration  than  much  greater  operations  would  have 
been.  Yet,  even  on  this  day,  "Wilson,  Morgan  &  Com- 
pany had  had  dealings  with  seventeen  different  firms, 
bought  2,900  shares  of  stock  and  sold  3,000.  Under  the 
old  no.-clearance  system  it  would  have  had  to  make 
seventeen  different  settlements  on  this  day,  involving 

*  The  names  used  are  fictitious. 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE        171 

the  sum  of  $519,411.14.  But  by  means  of  the  Clearing- 
House  it  is  enabled  to  settle  the  whole  business  by  draw- 
ing a  draft  for  $461.14  and  delivering  300  shares  of 
Union  Pacific,  preferred,  for  which  it  receives  a  check 
for  $26,400  and  by  accepting  200  shares  of  Steel,  pre- 
ferred, for  which  it  gives  a  check  for  $18,800.  The  clear- 
ance is  therefore  reduced  from  seventeen  deliveries  to 
two,  and  from  seventeen  checks  amounting  to  $519,411.14 
to  three  checks  amounting  to  $45,661.14. 

This  is  by  no  means  an  uncommon  case.  Many  might 
have  been  given  in  which  the  process  of  elimination  was 
greater.  There  has  been  one  instance  in  which  204,000 
shares,  valued  at  $12,500,000  on  one  side,  have  been  set- 
tled by  a  payment  of  about  $10,000. 

Mr.  Morgan  having  made  his  purchases  and  sales  in 
the  Board-Room,  reports  them  by  telephone  to  his  firm. 
In  ex-Clearing-House  transactions  comparison  slips 
would  now  have  to  be  made  out,  but  in  Clearing-House 
transactions  clearance  or  exchange  tickets  take  their 
place.  The  seller  is  obliged  to  send  to  the  office  of  the 
buyer  a  ticket  printed  in  red  on  white  paper  to  dis- 
tinguish it  from  the  buyer's  ticket,  which  is  printed  in 
black  on  yellow  paper.  This  record  is  in  the  form  of 
an  order  on  the  Clearing-House  for  the  delivery  or  the 
receipt  of  the  stock.  For  instance,  Wilson,  Morgan  & 
Company  having  bought  100  Steel,  preferred,  at  94|, 
from  Watson,  Hubert  &  Company,  receives  from  that 
firm  a  white  paper  ticket  printed  in  ned  as  shown  on 
page  172. 

Wilson,  Morgan  &  Company  compare  this  ticket  with 
their  own  record  of  the  transaction,  and  if  the  two  agree 
the  firm  gives  in  exchange  a  yellow  ticket  that  it  will 
receive  100  shares  of  Steel,  preferred.  The  firm  having 
sold  100  Union  Pacific,  preferred,  at  88£,  to  Roberts, 
Blair  &  Company,  sends  to  its  office  a  white-red  ticket 


EXD_ 
CKD_ 


NEW  YORK,. 


CLEARING-HOUSE  OF  TH1 


OFFICE  ADDRESs, 


RECEIVE  FROM 


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J 


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•Ht(T  CULT  TMOtl  Tl    INMCTIOI   I  fOU 


THE  C 


JEW  YORK  STOCK  EXCHANGE 

^  ._S\ys  CLEARING  SHEET  OF 


OEtlVKR  TO 


SHARES  STOCK 


tfL 


BOTH  r>  mia  WILL  at  FINED 


RANGE  SHEET 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE        173 

like  that  it  has  received  from  Watson,  Hubert  &  Com- 
pany. Roberts,  Blair  &  Company  compare  the  ticket 
with  their  record,  and,  if  found  correct,  give  a  yellow- 
black  ticket — shown  on  page  172 — in  exchange. 

Having  made  these  comparisons  and  exchanges  of  tick- 
ets with  all  the  firms  with  which  it  has  had  dealings, 
Wilson,  Morgan  &  Company  now  make  up  their  clear- 
ance sheet  for  the  day's  transaction  with  the  result 
shown  in  the  accompanying  folder. 

As  the  firm  has  bought  or  borrowed  and  sold  or  loaned 
700  shares  of  Atchison,  all  that  it  is  necessary  to  do  is  to 
ascertain  the  difference  between  the  buying  contract 
price  and  the  selling  contract  price.  As  it  bought  1,500 
shares  and  sold  1,300  shares  of  Steel,  preferred,  it  can 
clear  on  its  own  sheet  1,300  shares  in  like  manner  by  as- 
certaining the  difference  in  contract  prices,  leaving  a 
balance  of  200  shares  to  be  received.  As  it  bought  700 
Union  Pacific,  preferred,  and  sold  1,000  shares,  it  can 
clear  700  shares  by  finding  the  difference  between  the 
contract  prices,  leaving  300  shares  to  be  delivered.  As 
these  deliveries  are  to  be  made  at  the  fixed  delivery 
prices,  the  firm  must  ascertain  the  difference  between 
the  contract  and  delivery  prices  to  ascertain  what  is  its 
credit  or  debit.  The  firm  bought  the  1,500  shares  of 
Steel,  preferred,  for  $141,575,  and  sold  1,300  shares  for 
$122,200,  leaving  $19,375  as  the  cost  of  the  remaining 
200  shares.  But  as  the  delivery  price  is  94,  it  will  ac- 
tually pay  only  $18,800  for  the  stock  on  delivery.  So 
that  it  is  debit  for  $575  to  the  Clearing-House,  which 
will  pay  the  sum  to  the  firm  or  firms  to  which  it  rightly 
belongs.  The  profit  on  the  700  shares  of  Atchison  is 
$710.34,  which  is  therefore  due  the  firm  from  the  Clear- 
ing-House. There  now  remains  the  Union  Pacific,  pre- 
ferred, 700  of  which  were  bought  for  $61,600  and  1,000 
sold  for  $88,325.80.  It  is  due  to  receive,  therefore,  $26,- 


Q 


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NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE        175 


725.80  for  the  300  shares  more  that  have  been  sold  than 
bought,  but  under  the  delivery  price  it  will  receive  only 
$26,400,  so  that  a  balance  of  $325.80  is  due  it  from  the 
Clearing-House.  It  appears,  therefore,  that  the  firm  is 
debtor  $575  to  the  Clearing-House  and  creditor  $710.34 
and  $325.80,  or  a  total  of  $1,036.14,  leaving  a  credit  bal- 
ance of  $461.14. 

It  is  all  a  matter  of  simple  bookkeeping.  The  firm 
now  draws  a  draft  for  its  credit  balance  on  the  Man- 
hattan Bank,  in  which  the  Clearing-House  keeps  its  ac- 
count. The  form  of  this  draft  is  shown  on  the  preceding 
page. 

CLEARING-HOUSE  OF  THE  NEW  YORK  STOCK  EXCHANGE. 

THE  UNDERSIGNED  WILL  DELIVERFOLLOWINO  BALANCE  OF  STOCK 
AT  THE  DELIVERY  PRICE 


DELIVER  TO 


7 


STATEMENT  OF  STOCK  TO  DELIVER 


This  draft,  together  with  the  clearance  sheet  and  all 
the  exchange  tickets  it  has  received  from  the  firms  rep- 
resenting the  other  side  to  the  transactions,  Wilson,  Mor- 
gan &  Company  deliver  at  the  Clearing-House  within 
four  hours  after  the  close  of  the  Exchange,  on  the  day 
that  the  transactions  are  made,  except  Friday.  Friday's 


176  WORK  OF  WALL  STREET 

and  Saturday's  sheets  are  turned  in  on  Saturday  and  the 
clearance  is  made  Monday.  The  other  firms  will  send 
to  the  Clearing-House  the  tickets  Wilson,  Morgan  &  Com- 
pany have  given  out,  so  that  both  sides  have  complete 
vouchers  for  the  sale  and  the  Clearing-House  has  full 
authority  to  clear.  If  Wilson,  Morgan  &  Company's 
sheet,  instead  of  showing  a  credit  in  their  favor,  had 
shown  a  debit,  it  would  have  sent,  instead  of  a  draft, 
a  check  for  the  amount  of  the  debit  on  the  firm's  own 
bank. 

At  the  same  time  it  delivers  the  sheet  at  the  Clearing- 
House  it  must  hand  in  statements  of  the  amount  of  stock 
it  has  to  deliver  or  to  receive  on  balance,  in  the  form 
shown  on  page  176. 

The  Clearing-House,  having  in  the  meantime  examined 
and  audited  all  the  items  and  made  up  its  allotment 
sheets,  will  the  next  day  at  9.30  A.  M.  return  this  state- 
ment to  Wilson,  Morgan  &  Company,  with  the  name  of 
the  firm  to  which  it  must  deliver  the  Union  Pacific,  pre- 
ferred, or  from  whom  it  must  receive  the  Steel,  preferred, 
as  the  case  may  be.  About  noon  of  the  same  day  it  will 
receive  back  the  draft,  with  the  signature  of  the  manager 
written  in  the  margin  under  the  word  "Approved." 
This  draft  it  will  deposit  in  its  bank  and  collect  through 
the  Bank  Clearing-House.  This  closes  the  firm's  deal- 
ings with  the  Clearing-House  for  the  day,  but  it  must 
now  deliver  the  300  Union  Pacific,  preferred,  to  the 
firm  indicated  by  the  Clearing-House,  and  for  this  it  will 
receive  $26,400  and  must  accept  200  shares  of  Steel,  pre- 
ferred, for  which  it  must  pay  $18,800.  When  the  ac- 
counts are  balanced  the  result  will  be  exactly  the  same 
as  if  it  had  had  separate  settlements  with  each  of  the 
other  seventeen  firms  with  which  it  had  dealings  the 
day  before.  The  difference  is  that  it  has  saved  time, 
trouble,  and,  above  all,  the  extra  bank  certification  of 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE       177 

checks  involved  in  ex-Clearing-House  transactions. 
Failure  to  deliver  or  receive  stock  after  passing  through 
the  Clearing  House  is  dealt  with  under  the  rules  of  the 
Exchange  governing  failures  to  fulfill  contract. 

It  may  be  remarked  that  the  Clearing-House  in  cases 
of  insolvency  has  saved  much  of  the  time  and  loss  in- 
volved in  making  settlements.  For  the  service  per- 
formed by  the  Clearing-House  each  firm  pays  2£  cents 
per  100  shares  of  $100  par  value.  Only  100-share  lots 
and  multiples  thereof  are  cleared.  No  bonds  are  cleared 
except  on  special  occasions.  Fines  are  imposed  for  mis- 
takes and  delays  in  delivering  sheets,  etc.  Tickets  that 
are  exchanged  and  sent  to  the  Clearing-House  must 
agree,  or  both  parties  are  fined. 

The  delivery  prices  are  established  by  the  Clearing- 
House  every  afternoon.  These  are  as  near  as  possible  to 
the  closing  prices  of  the  day,  avoiding  all  fractions,  and 
as  soon  as  established  are  sent  over  the  tickers. 

The  whole  system  of  stock,  clearances  on  the  outside 
of  the  Clearing-House  has  now  been  explained.  The 
system  within  the  Clearing-House  is  fully  as  simple,  ac- 
curate, and  clear.  As  the  hours  are  long,  the  work  going 
on  by  night  as  well  as  day,  two  managers  are  employed 
and  an  ample  force  of  clerks.  Everything  is  systema- 
tized as  completely  as  in  a  bank.  Each  clerk  has  his  ap- 
pointed place  and  duty.  The  clerks  at  the  windows  who 
receive  the  clearance  sheets  and  tickets  examine  the 
items  and  total  to  see  that  they  are  properly  made  out, 
and  then  they  are  passed  to  other  clerks,  who  audit  them 
carefully.  The  exchanged  tickets  are  distributed  in  tiers 
of  boxes  like  mail  in  a  post-office,  and  these  tickets  are 
taken  to  clerks  who  compare  them  with  the  clearance 
sheet.  The  tickets  for  delivery  of  stock  balances  are 
also  sorted  and  taken  to  the  clerk  who  makes  out  the 
allotment  sheets.  Each  stock  has  its  own  sheet,  on  the 


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NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE        179 

debit  side  of  which  are  put  the  names  of  those  due 
to  receive  stock,  and  on  the  credit  side  those  who  will 
deliver.  It  is  now  comparatively  easy  to  make  the 
allotments,  as  the  specimen  sheet  on  page  178  will 
show. 

J.  Dowson  &  Company  deliver  200  to  C.  Jones  &  Com- 
pany; Helm  Hayes  &  Company,  400  to  V.  W.  James  & 
Company  and  100  to  J.  C.  "Warwick  &  Company;  Rollins 
Brothers,  100  to  J.  P.  Smith  &  Company ;  H.  L.  Henry  & 
Company,  100  to  Lawson  &  Brown;  C.  H.  Krouse  &  Com- 
pany, 300  to  Cullen  &  Mullen;  Lamb  Brothers  &  Com- 
pany, 300  to  the  same  firm ;  and  J.  C.  Lee,  300  to  Crosby, 
Jackson  &  Company.  Of  course  there  are  always  as 
many  stocks  bought  as  there  are  sold,  so  that  both  sides 
of  the  sheet  will  exactly  balance. 

Secrecy. — The  establishment  of  the  stock  clearance 
system  was  long  opposed  because  of  fear  that  the  clear- 
ance sheets  would  give  too  much  information  about  im- 
portant operations  to  the  clerks  in  the  Clearing-House. 
Experience  has  demonstrated  that  operations  are  as  read- 
ily concealed  under  the  new  as  the  old  system.  Loans 
of  stock,  for  instance,  appear  on  the  clearance  sheets  as 
sales,  and  any  clerk  seeing  the  sheet  could  not  tell 
whether  the  transactions  were  loans  or  sales,  and  there- 
fore the  sheet  would  have  no  meaning  to  him.  Likewise 
stocks  that  appear  as  having  been  bought  may  have 
really  been  borrowed  in  operations  on  the  short  side. 
Large  operators  nearly  always  employ  two  or  more  bro- 
kers, and  conceal  their  operations  by  arranging  their 
orders  so  as  to  prevent  anyone  from  knowing  what  they 
are  really  doing.  Even  a  broker  may  not  be  able  to  tell 
whether  his  customer  is  really  a  bull  or  a  bear,  for  while 
the  operator  may  be  buying  through  this  broker  he  is 
selling  through  another.  How  much  less,  therefore,  can 
the  clerk  in  the  Clearing-House  comprehend  what  he  may 


180  WORK  OF  WALL  STREET 

see  of  the  transactions  of  the  brokers.  Besides,  the  work 
of  the  Clearing-House  is  distributed  among  many  per- 
sons. One  clerk  sees  only  one  small  part  of  what  is 
going  on,  just  as  a  common  soldier  sees  only  the  small 
section  of  the  battlefield  in  which  he  is  fighting,  and  is 
probably  in  entire  ignorance  of  how  the  battle  as  a  whole 
is  progressing.  The  work  must  be  done  too  quickly  for 
close  inspection,  and,  moreover,  it  is  facilitated  by  the 
use  of  numbers.  Each  member  and  firm  has  a  number, 
which  he  must  stamp  on  everything  he  sends  to  the 
Clearing-House,  and  allotments  are  made  and  clear- 
ances consummated  very  largely  by  the  use  of  these 
numbers.  Persons  are  of  no  account  in  the  Clearing- 
House.  It  looks  merely  at  numbers,  balances,  and 
exchanges. 

The  Clearing-House  guards  its  secrets  strictly,  and 
there  has  never  been  an  instance  of  any  disclosure  of  in- 
formation that  should  be  kept  private.  Clearance  sheets 
and  tickets  are  returned  to  the  different  firms  after  the 
clearance  has  been  consummated.  The  Clearing-House 
keeps  no  records.  Necessarily  in  making  clearances  it 
audits  the  great  bulk  of  the  transactions  of  the  Ex- 
change, no  small  service  in  itself. 

Note. — It  has  been  impossible  to  obtain  statistics  show- 
ing the  operations  of  the  Stock  Exchange  Clearing- 
House  for  any  later  year  than  1901,  although  a  statement 
for  the  panic  year  1907  would  have  been  valuable,  es- 
pecially as  the  clearing  system  contributed  greatly  to 
safeguarding  the  financial  position  in  that  time  of  panic 
by  preventing  many  failures  which  would  otherwise  have 
occurred.  Attention  should  be  given  to  the  report  of 
the  Hughes  Commission  confirming  the  statements  of 
this  chapter  written  years  before,  that,  while  the  clear- 
ance system  may  facilitate  gambling  transactions,  it  is 


NEW  YORK  STOCK  EXCHANGE  CLEARING-HOUSE        181 

absolutely    necessary    for    the    legitimate    business    and 
orderly  transaction  of  the  stock-market. 

REFERENCES 

"Stock   Exchange  Clearing-Houses,"  A.   D.   Noyes,  Political  Sci- 
ence Quarterly,  VIII,  252. 


CHAPTER  XII 

TOOLS  OF  WALL  STREET 

"Our  current  political  economy  does  not  sufficiently 
take  account  of  time  as  an  element  in  trade  operations," 
said  "Walter  Bagehot.  The  Wall  Street  system,  however, 
takes  large  account  of  time.  Every  part  of  its  mechan- 
ism is  regulated,  as  it  were,  by  a  time  clock. 

Most  of  the  tools  of  Wall  Street  are  time-savers.  The 
six  most  important  are: 

The  stock-indicator. 

The  telegraph. 

The  cable. 

The  telephone. 

The  news  slips. 

The  market  reports. 

There  was  active  speculation  before  the  introduction, 
in  1867,  of  the  stock-indicator,  or  "ticker"  as  it  is  called, 
but  it  is  difficult  to  conceive  now  of  a  market  deprived 
of  its  use  and  compelled  to  rely  upon  quotations  carried 
by  brokers  from  office  to  office.  The  very  life  of  the 
Street  seems  to  depend  upon  accurate,  immediate,  and 
continuous  quotations  from  the  Stock  Exchange. 

The  Tape. — These  are  provided  by  the  stock-indicator, 
a  marvelous  little  instrument  which  prints  upon  a  nar- 
row ribbon  of  paper  the  sales  and  prices  made  in  the 
Board-Room.  The  paper,  which  is  in  a  roll  or  spool, 
feeds  itself  into  the  ticker,  and  after  receiving  there  the 
printed  impressions  falls  into  a  basket  placed  besides 
the  machine.  In  the  vernacular  of  the  Street  this  paper 
is  called  the  "tape." 

The  Exchange  has  always  zealously  guarded  its  quo- 
tations, and  has  endeavored  to  prevent  them  from  reach- 

182 


TOOLS  OF  WALL  STREET  183 

ing  rival  institutions  or  the  bucket-shops.  But  it  sup- 
plies the  quotations  to  its  members  and  the  outside  pub- 
lic simultaneously.  Its  own  corps  of  reporters  obtain 
the  sales  as  they  are  made  in  the  Board-Room  and  carry 
them  to  four  telegraph  stations  placed  in  convenient 
parts  of  the  room.  These  send  the  quotations  instantly 
to  a  gallery  where  the  employes  of  the  two  ticker  com- 
panies are  stationed.  One  of  these,  the  New  York  Quo- 
tation Company,  is  owned  and  controlled  by  the  Ex- 
change, and  it  supplies  the  quotations  to  its  members. 
Its  tickers,  about  1,150  in  number,  do  not  extend  outside 
of  the  Wall  Street  district.  The  other  company,  the 
Gold  and  Stock,  is  independent  of  the  Exchange,  but  gets 
the  quotations  simultaneously  with  the  other,  and  has 
the  right  to  sell  them,  under  certain  restrictions  here- 
after noted,  to  any  one  desiring  them.  As  a  matter  of 
fact,  tickers  are  to  be  found  in  almost  every  public  place. 
They  are  indispensable  adjuncts  of  every  banking  and 
brokerage  office. 

A  number  of  years  ago  the  Stock  Exchange  had  a  long 
controversy  with  the  then  existing  ticker  company.  It 
was  charged  that  the  latter  supplied  indicators  to  bucket- 
shops,  and  the  Exchange  was  bound  to  break  up  this 
abuse  of  its  quotations.  The  controversy  was  carried 
into  the  courts,  and  the  question  was  raised  as  to  the 
right,  of  the  Exchange  to  withhold  its  quotations  from 
the  public.  In  the  end  the  Exchange  made  a  satisfactory 
contract  with  the  company,  supplying  the  public  with 
quotations,  and  established  its  special  service  for  its  own 
members. 

While  the  quotations  are  reported  as  soon  after  they 
are  made  as  it  is  possible  to  gather  them,  it  takes  some 
time,  of  course,  to  get  them  to  the  indicator,  and  it  fol- 
lows that  the  ticker  is  always  a  little  behind  the  actual 
market.  On  an  ordinary  day  the  difference  in  time  be- 
14 


184  WORK  OF  WALL  STREET 

tween,  say,  the  close  of  the  market  and  the  record  of  the 
final  sales  on  the  tape  may  not  amount  to  more  than  one 
or  two  or  three  minutes,  but  on  a  very  active  day,  when 
the  transactions  are  heavy,  it  has  taken  the  ticker  ten 
minutes  and  even  more  to  record  the  accumulation  of 
sales.  The  speed  with  which  the  sales  made  in  the  Ex- 
change reach  the  public  is  marvelous,  and  proves  the 
perfection  of  the  system  employed.  Occasionally,  a  mis- 
take is  made,  but  there  is  always  a  swift  correction. 

Abbreviations. — As  there  are  more  than  a  thousand 
different  stocks  and  bonds  more  or  less  regularly  traded 
in  at  the  Exchange,  many  of  them  bearing  the  long 
names  of  their  corporations,  it  is  necessary  to  use  ab- 
breviations in  reporting  quotations  on  the  tape.  To  the 
uninitiated,  the  tape  appears  to  be  a  meaningless  jumble 
of  letters  and  figures  almost  as  undecipherable  as  a  cable 
code  or  Egyptian  hieroglyphics.  But  the  broker  and 
regular  habitue  of  the  Street  learns  to  read  it  as  readily 
as  a  priest  reads  his  Latin.  A  large  chart  containing 
the  abbreviations  goes  with  each  ticker,  but  it  is  rarely 
consulted.  Here  are  the  abbreviations  used  for  a  few 
of  the  more  active  stocks: 

A    Atchison,  Topeka  &  Santa  Fe. 

B     Brooklyn  Rapid  Transit. 

C    Amalgamated  Copper. 

D     Denver  and  Rio  Grande. 

E    Erie. 

G    Consolidated  Gas. 

H    New  York  &  Harlem. 

J    Central  Railway  of  New  Jersey. 

K    Missouri,  Kansas  &  Texas. 

L    Louisville  &  Nashville. 

M    Manhattan  Elevated. 

N    Norfolk  &  Western. 

P    Pacific  Mail. 


TOOLS  OF  WALL  STREET  185 

Q     Chicago,  Burlington  &  Quincy. 
R    Rock  Island  Co. 
S     American  Sugar  Refining  Co. 
T     Texas  &  Pacific. 
U    Union  Pacific. 
W     Western  Union. 
BO     Baltimore  &  Ohio. 
CA     Canadian  Pacific. 
DL    Delaware,  Lackawanna  &  Co. 
GC     General  Chemical. 
HR    International  Harvester  Co. 
IP     International  Paper  Co. 
LR     United  States  Leather  Co. 
MM     St.  Paul,  Minneapolis  &  Manitoba. 
NP    Northern  Pacific. 
OW    New  York,  Ontario  &  "Western. 
PA    Pennsylvania  R.  R. 
RG    Reading  Co. 
SB     Seaboard  Air  Line. 
PR    Preferred. 

X     ex-dividend. 
UR    Under  the  Rule. 

Several  of  the  abbreviations  are  responsible  for  the 
popular  Street  nicknames  of  leading  stocks.  For  in- 
stance, because  MP  stands  on  the  tape  for  Missouri  Pa- 
cific, that  stock  is  generally  called  "Mop."  NP  stands 
for  Northern  Pacific,  which  goes  by  the  name  of  "Nip- 
per, "'the  common  being  called  "little",  and  the  pre- 
ferred "big."  PO  standing  for  People's  Gas  Light  and 
Coke  Company,  that  stock  is  often  called  "Post-office." 
The  same  law  of  economy  in  the  use  of  words  applies  to 
all  the  active  stocks. 

On  page  186  is  a  section  of  a  stock  tape  just  as  it 
comes  from  the  ticker. 

This  being  interpreted  reads :  200  shares  Union  Pacific 


186  WORK  OF  WALL  STREET 

at  17},  mistake,  and  thrown  out;  200  shares  Union  Pa- 
cific at  177};  400  American  Smelting  &  Refining  at  74; 
200  Lehigh  Valley  at  178$;  600  do.  at  178$;  200  do.  at 
178| ;  100  shares  Utah  Copper  at  50$;  1,000  shares 
United  States  Steel  at  64£ ;  600  at  64$;  200  at  64|5 
100  Chicago,  Milwaukee  &  St.  Paul  at  111} ;  100  Ameri- 
can Tobacco-,  preferred,  at  100$;  200  Miama  at  22$; 
100  at  22$;  200  at  22};  900  Union  Pacific  at  177};  100 
Republic  Iron  &  Steel  at  23;  200  Reading  at  151  f;  100 

U~~  ~u~~  AR  LV 

200.17^222*   200.1*77^     400.74     200. 1 78j. 600.^.200. § 

f       US~  ~~ST         ATP         MT~ 

502      1000. 642. 600. 1.200. I      M   4        I00|     200 


.22U) 

U~  RBC     RG  ~"fOU       9       0*        IBP         ~~) 

00.1900.177*       23     200.151!-!        I 8g   423     40|        200.4?) 


m~  ~~co 

\    300. I5I|. 200. §.10004. 700. 1     754 


600.641      151^   20Q.I77A.800.g     200.118% 
THE  STOCK  TAPE  AS  IT  COMES  FROM  THE  "TICKER" 

at  1513;  100  Toledo,  St.  Louis  &  Western  at  18f;  100 
do.  preferred,  at  42$;  100  Ontario  &  Western  at  40$; 
200  Interborough  Metropolitan,  preferred,  at  47;  300 
Reading  at  151f;  200  at  151  f;  1,000  at  151$;  700  at 
151  f;  100  Chesapeake  &  Ohio  at  75$;  100  Nevada 
Consolidated  Copper  at  18|;  100  Amalgamated  Copper 
at  63$;  600  United  States  Steel  at  64$;  100  Reading  at 
151$;  200  Union  Pacific  at  177};  800  at  177f;  200 
Northern  Pacific  at  118$. 

"The  letters  and  figures  used  in  the  language  of  the 


TOOLS  OF  WALL  STREET 


187 


tape,"  said  a  noted  Boston  operator,  "are  very  few,  but 
they  spell  ruin  in  ninety-nine  million  ways. ' ' 

Notwithstanding  the  abbreviations,  the  number  of 
printed  impressions  every  day  is  very  large,  although 
much  less  than  the  number  of  shares  sold.  For  instance, 
on  April  30,  1901,  when  3,234,339  shares  were  sold,  be- 
sides a  large  number  of  bonds,  the  printed  impressions 
on  the  tape  numbered  79,200.  The  New  York  Quotation 
Company  has  a  delicate  little  machine  for  taking  an  ac- 
curate count  of  the  characters  printed  on  the  tape,  and 
it  has  kept  a  record  for  a  number  of  years  past.  Their 
record  is  as  follows  to  which  is  added  the  number  of 
shares  traded  in  and  their  approximate  value : 


Year 

No.  of  Shares 
Traded  in 

Approximate 
value  * 

No.  of  Im- 
pressions on 
Stock  Tape 

1890  

71,282,885 

$  3,977,664,193 

7,200,000 

1891  

69,031,689 

3,812,247,419 

7,200,000 

1892  

85,875,092 

4,874,014,262 

7,104,010 

1893  

80,977,839 

4,550,260,916 

6,900,700 

1894  

49,075,032 

3,094,942,769 

5,500,000 

1895  

66,583,232 

3,808,338,604 

6.814,900 

1896  

54,654,096 

3,329,969,940 

6,324,000 

1897  

77.324,172 

4,973,553,065 

8,232,000 

1898  

112,699,957 

8,187,413,985 

10,324,600 

1899  

176,421,135 

13,429,291,715 

11,931,700 

1900  

138,380,184 

9,249,285,109 

10,217,100 

1901  

265,944,659 

20,431,960,551 

12,830,500 

1902  

188,503,403 

14,218,440,083 

11,139,900 

1903  

161,102,101 

11,004,083,001 

10,276,100 

1904  

187,312,065 

12,061,452,399 

9.874,700 

1905  

263,081.156 

21,295,723,688 

10,420,400 

1906  

284,298,010 

23,393,101,482 

10,738,100 

1907  

196.438,824 

14,757,802,189 

8,808,200 

1908  

197,206,346 

15,319,491,797 

9,553,600 

1909  

214,632,194 

19,142,339,184 

10,130,400 

1910  

164,051,061 

14,124,875,897 

8,260,100 

1911  

127,208,258 

11,003,600,829 

7,719,840t 

*  The  approximate  value  of  all  the  stocks  traded  in  on  the  New 
York  Stock  Exchange  in  twenty-one  years  amounted  to  about  $240,- 


188 


WORK  OF  WALL  STREET 


In  1910  it  took  one  hundred  and  five  thousand  pounds 
of  paper  to  supply  the  tickers  of  the  New  York  Quota- 
tion Company. 

The  chart  below,  while  applying  only  to  the  num- 
ber of  printed  impressions  on  the  tape,  is  given 
because  it  is  also  valuable  as  showing  the  volume 
of  stock  and  bond  transactions  from  1890  to  1901.  As 


H 

rz 
H 

• 

1' 

?  « 
IT 


Tears  1890        1891       1892       1893       1891       1895        189«       1897        1898        1899        1900       1901 

CHART  SHOWING  NUMBER  OF  IMPRESSIONS  ON  TAPE 

the  sales  are  almost  always  heaviest  in  the  bull  years, 
the  chart  may  be  taken  as  a  bird's-eye  view  of  the  stock- 
market  during  that  period. 

The  ticker,  among  its  other  offices,  is  a  timekeeper 
for  the  Street.  The  rule  for  delivery  of  stocks  being 
very  strict,  and  the  time  for  delivery  expiring  at  2:15 
p.  M.,  the  ticker  every  day  at  fourteen  minutes  after  two 
prints  "time"  on  the  tape,  and  shortly  after  the  instru- 
ment gives  fifteen  distinct  beats,  at  the  end  of  which 
it  is  exactly  settlement  time.  Nearly  every  timepiece 
in  the  Street  is  regulated  by  the  tape. 

000,000,000,  of  which  about  $119,000,000,000  represents  the  dealings 
of  the  last  seven  years.     In  ten  years  the  stock  sales  exceeded  the 
present  estimated  wealth  of  the  United  States. 
f  December  impressions  partly  estimated. 


TOOLS  OF  WALL  STREET  189 

Besides  the  1,150  stock  tickers  operated  by  the  New 
York  Quotation  Company,  the  Gold  and  Stock  Company 
operates  about  seven  hundred  and  fifty,  rented  to  cus- 
tomers in  Manhattan,  Brooklyn,  and  Jersey  City.  No 
one  can  rent  one  of  these  machines  whose  name  has  not 
been  approved  by  a  committee  of  the  Exchange.  This 
rule  is  being  observed  to  prevent  the  tickers  being 
placed  in  bucket-shops.  Besides  the  stock  tickers,  there 
are  one  hundred  machines  reporting  the  grain  and  prod- 
uce quotations  of  the  New  York  Produce  Exchange,  one 
hundred  giving  the  quotations  of  the  Chicago  Board  of 
Trade,  fifty  giving  the  quotations  of  the  Cotton  Ex- 
change, and  twenty-five  reporting  the  quotations  of  the 
Coffee  Exchange.  There  are  also  over  a  thousand  other 
tickers  supplying  financial,  sporting,  and  general  news. 
Some  of  these  tickers  print  the  news  on  a  broad  ribbon 
of  paper  just  as  if  it  had  come  from  a  typewriter.  Out- 
side of  New  York  there  are  twenty  cities  which  have 
ticker  services  of  their  own.  No  better  proof  is  needed 
of  the  universality  of  speculation. 

Quotations  Non-official. — The  Stock  Exchange  reports, 
but  does  not  guarantee  its  quotations.  Every  day  at 
the  close  of  the  market,  a  printer,  as  a  private  business 
enterprise,  publishes  a  complete  record  of  the  day 's  trans- 
actions. This  is  a  semi-official,  but  not  an  official .  quo- 
tation list.  The  printer  has  the  authorization  of  the  Ex- 
change, and  he  is  obliged  quickly  to  correct  every  error. 
The  list  as  a  matter  of  fact  is  correct,  but  it  is  not  an 
official  record.  Moreover,  the  Exchange  keeps  no  offi- 
cial statistics. 

The  Telegraph.— Of  the  value  to  Wall  Street  of  the 
telegraph  it  is  hardly  necessary  to  speak,  so  universal 
has  become  the  use  of  this  great  tool  of  business.  Dr. 
Norvin  Green,  a  few  years  ago,  estimated  that  one  per- 
son out  of  sixty  in  the  United  States  made  use  of  the 


190  WORK  OF  WALL  STREET 

telegraph,  and  that  46  per  cent,  of  all  the  messages 
transmitted  applied  to  speculative  transactions.  In  this 
estimate,  however,  he  included  messages  relating  to  the 
race-tracks.  The  percentage  of  speculative  messages  has 
undoubtedly  increased  since  this  estimate  was  made. 
As  Wall  Street  is  the  hub  of  the  great  wheel  of  specu- 
lation, the  extent  of  the  use  of  the  telegraph  there  is  ob- 
vious. 

Many  brokers  lease  wires  to  connect  their  Wall  Street 
offices  with  branches  in  other  parts  of  the  city  and  coun- 
try. One  firm  has  twelve  private  wires. 

The  Cable. — The  cable  may  be  said  to  have  almost  rev- 
olutionized the  commerce  of  the  world.  The  transac- 
tions and  prices  of  one  market  are,  by  its  use,  now  known 
simultaneously  in  the  markets  of  every  other  country. 
Distance  and  time  have  been  annihilated.  "We  are  of 
opinion,"  says  Arthur  Crump,  in  his  Theory  of  Stock 
Speculation,  "that  the  complete  communication  that  is 
now  established  between  the  commercial  and  monetary 
markets  will  tend  gradually,  if  not  rapidly,  to  diminish 
the  effect  of  the  commercial  crisis." 

The  cable  has  put  every  market  on  a  contemporaneous 
basis.  The  death  of  McKinley  at  Buffalo  and  that  of 
Cecil  Rhodes  in  South  Africa  was  known  in  every  great 
city  of  the  world  almost  as  soon  as  each  event  occurred ; 
but  seventy-five  years  ago  the  news  of  the  death  of 
Nathan  Meyer  Rothschild  was  carried  to  the  London 
Stock  Exchange  by  carrier  pigeons.  Several  London 
brokers  then  maintained  private  systems  of  carrier 
pigeons  connecting  them  with  Paris.  This  was  the  early 
substitute  for  the  cable. 

James  K.  Medbury,  writing  three  or  four  years  after 
the  establishment  of  the  first  working  cable  in  1866,  the 
one  laid  eight  years  earlier  having  broken  down,  said 
that  New  York  brokers  were  then  paying  $1,000,000  a 


TOOLS  OF  WALL  STREET  191 

year  for  London  dispatches.  Rates  were  very  high  in 
1866.  Twenty  words  to  London  cost  $100,  as  compared 
with  $5  to-day,  and  George  Stoker,  the  cable-packer, 
began,  by  «,  system  of  codes,  to  pack  several  messages 
into  one.  In  1902,  according  to  Vice-President  Ward 
of  the  Commercial  Cable,  fully  95  per  cent,  of  all  cable 
messages  were  written  in  codes,  so  constructed  as  to  make 
one  word  do  the  work  of  five  and  even  twelve.  Elabo- 
rate codes  have  been  constructed,  and  by  the  aid  of  the 
"Western  Union  Code  book  one  can  cable  and  telegraph 
to  any  part  of  the  world,  securing  economy  with  secrecy. 
Many  concerns,  moreover,  have  private  codes. 

The  manager  of  one  of  the  leading  cable  companies  has 
estimated  that  thirty  per  cent,  of  all  the  cable  business  of 
this  country  emanated  from  New  York.  How  large  Wall 
Street's  share  of  this  is  may  be  judged  from  the  fact 
that  on  an  average  there  are  one  thousand  Wall  Street 
cable  messages  a  day.  While  most  cable  messages  are 
short,  averaging  four  to  six  words,  they  tell  a  great  deal. 
A  banking  house  will  sometimes  pack  a  dozen  or  more 
cable  transfers  of  money  into  one  message.  For  the  ar- 
bitrage business  an  express  wire  is  needed.  A  cable 
company  sets  aside  one  of  its  London  cables,  during  busi- 
ness hours,  for  this  work.  In  the  Exchange  build- 
ing telegraph  and  cable  messages  are  sent  by  pneumatic 
tubes  direct  from  the  Board-Room  to  the  telegraph 
offices. 

Telephones. — In  no  other  part  of  the  world  is  the  tele- 
phone put  to  such  general  and  important  use  as  in  Wall 
Street,  and  its  use  has  greatly  increased  in  the  last  ten 
years,  in  both  the  stock-  and  money-markets.  There  are 
408,769  telephones  in  New  York  City,  and  there  are  proba- 
bly a  greater  number  in  the  Wall  Street  district  than  in 
any  other  equal  territory  in  the  world.  About  five  hun- 
dred of  the  members  of  the  Stock  Exchange  maintain 


192  WORK  OF  WALL  STREET 

private  telephone  connection  to  the  Board-Room.  Prac- 
tically every  order  executed  in  the  Exchange  is  received 
by  the  Board  member  from  his  office  over  the  telephone, 
and  as  soon  as  the  order  is  executed  he  reports  the  sale, 
the  price,  and  the  name  of  the  other  party  to  the  trans- 
action over  the  telephone.  Business  aggregating  often 
over  $100,000,000  a  day  is  thus  actually  transacted  by 
telephone — a  most  impressive  proof  of  the  value  of  this 
invention,  now  in  use  only  thirty-five  years.  In  the 
Exchange  elaborate  provision  has  been  made  for  an  ex- 
tended use  of  the  telephone.  Notwithstanding  the  noise 
and  confusion  on  the  floor,  and  the  fact  that  many  bro- 
kers are  shouting  through  the  telephones  at  the  same  time, 
mistakes  are  very  rare.  One  was  made  some  time  ago 
when  a  broker  mistook  an  order  to  buy  as  one  to  sell. 
The  error  cost  him  thousands  of  dollars.  The  mistakes 
over  the  telephone,  however,  are  probably  no  greater 
than  occur  in  written  communications. 

News  Agencies. — Wall  Street  is  always  eager  for  the 
latest  news.  It  is  not  content  to  rely  on  the  morning 
and  evening  editions  of  the  daily  papers,  or  even  upon 
the  elaborate  articles  of  the  financial  press.  It  must 
have  the  news  the  instant  it  develops.  News  is  the  very 
air  that  speculation  breathes.  To  supply  this  need,  two 
news  agencies  exist  in  Wall  Street,  one  that  of  the  New 
York  News  Bureau,  and  the  other  that  of  Dow,  Jones  & 
Company,  founded  by  Charles  H.  Dow,  one  of  the  first 
to  give  a  scientific  form  to  stock-market  reports.  These 
two  concerns  issue  every  few  minutes  what  are  called 
the  News  Slips,  which  in  the  case  of  one  firm  are  printed 
on  yellow  paper  and  in  the  case  of  the  other  on  white. 
These  slips  are  of  convenient  size,  are  printed  on  rapid 
presses,  are  distributed  to  subscribers  by  an  army  of 
messengers  and  a  large  number  of  highly  trained  men 
contribute  to  their  publication.  The  brokers  keep  the 


TOOLS  OF  WALL  STREET  193 

slips  in  pads,  thus  having  at  all  times  a  complete  record 
of  the  day.  The  whole  world  is  covered  by  the  slips 
and  every  item  of  general  news  is  given,  but  especial 
attention  is  paid  to  railroad  earnings,  crop  reports,  and 
other  matters  bearing  directly  upon  the  market. 

DOW,  JONES  &  CO. 

THE  WALL  STREET  JOURNAL.  NEWS  BULLETINS 

ELECTRIC   PAGE   NEWS  TICKER. 
44  BROAD  ST.,  NEW  YORK. Telephone  One  Broad. 

Monday,   Nov.  27,   1911.  No.  58. 


RAILROAD  EARNINGS. 
St.  Louis  Southwestern: 

1911  1910                    Inc.                Dec. 

3rd   week   Nov $285,000  $284,732                $268 

July  1-Nov.  21 4,804,707  4,938,396                 133,689 

Montreal — New  York  exchange  62£  cents  discount;  off  15f  cents. 

COFFEE. 

11:30  a.  m. — Bid  prices: 

November,  14:50;  December,  14.50;  January,  14.15;  February,  14.05; 
March,  13.74;  April,  13.69;  May,  13.63;  June,  13.62;  July,  13.61;  August, 
13.58;  September,  13.55;  October,  13.54. 

0 

STOCK  MARKET. 

Although  trading  was  very  quiet,  the  market  showed  an  improving 
tendency  in  the  early  part  of  the  second  hour,  the  buying  apparently 
representing  an  accumulative  demand,  instead  either  of  covering  of 
shorts  or  manipulation  for  the  rise. 

The  interview  given  out  by  President  James  G.  Cannon,  of  the 
Fourth  National  Bank,  really  indicates  the  sort  of  buying  that  is 
now  seen  in  the  market.  Conditions  have  improved  substantially, 
and  stocks  are  being  bought  by  large  interests  in  the  belief  that  despite 
certain  political  uncertainties  the  market  is  entering  upon  a  new  period 
of  prosperity. 

St.  Paul  rallied  well,  its  action  strengthening  the  impression  that 
earlier  in  the  session  there  had  been  manipulation  designed  to  get 
prices  down  and  encourage  short  selling  of  the  stock. 

Atlantic  Coast  Line  and  Louisville  &  Nashville  showed  quiet 
strength,  and  the  street  was  still  bullish  on  the  stocks  of  southern 
roads  because  of  the  prosperous  conditions  prevailing  in  the  South. 

0 

Chicago — Dec.  wheat  94J,  off  i;  May  wheat  100|,  off  i;  July  wheat 
94f,  off  i;  Dec.  corn  63|,  off  J;  May  corn  64J,  unch.;  July  corn  64  J, 
unch. ;  Dec.  oats  47J,  unch.;  May  oats  49f,  off  J;  Jan.  pork  16.17,  off  10; 
Jan.  lard  9.30,  up  3. 

New  York — Dec.  wheat  99J,  off  f;  May  wheat  104|,  off  £. 

Paris — Wheat  closed  irregular,  i  up  to  t  off;  Jan. -Feb.  1.34c. 

Q 

Cotton  Exchange — Cotton  market  was  heavy  after  the  first  hour, 
very  close  to  the  low  levels  of  the  season.  There  were  reports  of  an 
easier  spot  situation  from  both  the  east  and  west  sections.  Bears 
hammered  at  times. 

0 

Call  money  lending  and  renewing  at  2f%. 

EXAMPLE  OF  WALL  STREET  NEWS  SLIP 


194 


WORK  OF  WALL  STREET 


A  reproduction  of  one  of  the  Dow,  Jones  &  Co.  slips 
is  given  on  page  193  in  order  that  the  reader  may  see  for 
himself  an  example  of  the  tabloid  journalism  upon  which 
Wall  Street  depends.  It  may  be  said  that  no  other 
journalism  in  the  world  is  as  rapid,  accurate  and  efficient 
as  that  of  Wall  Street.  Even  the  news  slips, — speedy 
and  admirable  as  they  are — are  not  quite  quick  enough 
for  all  the  Street's  purposes.  It  wants  the  news  flashed 
to  the  offices,  even  if  in  a  form,  that  is  a  mere  hint,  con- 
veying three  or  four  words  like  a  head  line  in  a  news- 
paper. To  supply  this  demand  both  news  agencies,  in 


PAGE  PRINTER 

addition  to  distributing  printed  slips,  telegraph  the  news 
to  subscribers,  using  marvelous  little  instruments  which 
print  their  information  on  little  sheets  in  the  brokers' 
own  offices.  A  picture  of  one  of  these  page  printers — 
that  of  the  New  York  News  Bureau — and  a  reproduc- 
tion of  a  section  of  its  product  will  give  the  reader  an 
idea  of  this  mechanism. 

News  Tickers. — All  that  is  necessary  to  convey  intel- 
ligence of  importance  to  the  banker  or  broker  is  a  two- 
wire  connection  from  the  news  bureau  to  a  compact  ma- 
chine in  his  office,  taking  up  a  space  of  less  than  a  square 
foot,  and  in  most  cases  standing  on  a  slender  pedestal 


THE   STOCK    MKT 

AFTER   CONTINUED    HEAVINESS  THE  MKT   TURNED   AB- 
RUPTLY   MANY   OF    THE   LEADING     ISSUES      BECOMING 
STRONG    AND  MAKING    SHARP  ADVANCES-    UN.PAC  ROSE 
ABOUT  2    PTS    FROM    I TS    LOWEST   AND   A   SUBSTANTIAL 
RISE   ALSO  OCCURRED    IN   READING .STEEL   OOMM.AND 
AME   SMELTING.    PRACTICALLY   EVERYTHING   ON      THE 
LIST   SHARED    IN  THIS    IMPROVEMENT, WHICH   CARRIED 
PRICES   AT    THE    CLOSE   ABOVE    YESTDYS   CLOSE.    UN.PAC 
SHOWED  A    NET  GA|N   OF    ABOUT    I    PT.AND   SUBSTANTIAL 
NET   GAINS  WERE    SHOWN    |N   READING .STEEL   COMMON 
AND    AMAL- 

GOVTS    UNCHGD.    OTHER  BONDS    IRREGULAR. 


MONEY     ON     CALL  - 

OPEN    3.    HIGH    3    3-4.    LOW    3-    LASTS   3-4-.   CLOSED 
3    1-2  A   3-4-.    RULING.  RATE  3   PC. 


LOAN  ING- RATES   ON   STOCKS 
STEEL   5    1-4.    OTHERS  2     1-2  AND   3«    FAIR   DEMAND. 

How  NEWS  is  PRINTED  ON  A  PAGE  PRINTER 


196  WORK  OF  WALL  STREET 

of  height  adjusted  to  the  convenience  of  those  in  whose 
office  it  may  be  placed.  A  roll  of  paper,  5V2  inches 
wide,  and  a  single  wheel  carrying  type  of  the  alphabet 
and  numerals,  are  the  only  features  about  it  that  may 
be  considered  as  attracting  attention  outside  of  the  news 
matter  that  is  transmitted. 

The  distance  over  which  these  instruments  may  be 
operated  has  as  yet  not  been  definitely  ascertained,  but 
in  actual  use  the  service  from  a  central  point  close  to 
the  Battery  extends  as  far  as  Yonkers,  as  well  as  across 
the  East  River  far  into  Long  Island.  The  page  printer 
is  in  some  respects  an  evolution  from  the  Stock  Ex- 
change ticker,  but  with  the  printing  wheel  placed  on 
a  bar,  along  which  it  is  forced  by  an  auxiliary  carrying 
bar.  The  instrument  with  its  glass  cover  occupies  a 
space  only  eight  inches  high  by  ten  inches  wide,  and  re- 
quires no  outside  assistance  other  than  that  of  the  key- 
board operator.  For  all  practical  purposes,  so  far  as 
the  receiver  is  concerned,  the  page  printer  is  automatic. 

Market  Reports. — The  first  regular  daily  stock-market 
report  appeared  in  London  in  1825,  and  the  New  York 
papers  were  quick  to  copy  after  their  London  contempo- 
raries. It  has  only  been  within  a  generation,  however, 
that  the  market  report  has  become  almost  a  science  re- 
quiring mastery  not  only  of  the  current  influences  af- 
fecting speculation,  but  also  of  the  fundamental  eco- 
nomic principles  underlying  business. 

The  market  report  performs  this  special  service  for 
the  banker,  the  broker,  and  the  operator.  It  saves  him 
much  of  the  trouble  and  time  of  analyzing  reports  and 
statements,  and  of  interpreting  movements.  This  is  the 
special  function  of  trade  journalism.  The  business  man 
would  require  a  large  reference  library  and  several 
clerks  to  obtain  for  himself  the  information  which  is  now 
furnished  for  him  by  the  experts  who  write  the  leading 


TOOLS  OF  WALL  STREET  197 

market  reports.  To  William  Dodsworth  the  Street  owes 
no  small  debt  for  elevating  the  standard  of  financial 
journalism. 

It  was  recently  computed  by  the  New  York  Times 
that  the  commercial  and  financial  articles  and  market 
reports  published  every  year  in  the  daily,  weekly,  and 
monthly  publications  of  this  country  would  make  nearly 
two  hundred  and  seventy-one  million  books  of  the  size 
of  "  David  Harum." 

More  than  one-fifth  of  everything  published  relates  to 
business. 

As  long  ago  as  1692  J.  Houghton  published  in  Lon- 
don a  weekly  review  of  the  commercial  operations  of 
that  time,  and  it  was  from  this,  one  of  the  earliest  of 
financial  publications,  that  Macaulay,  many  years  later, 
obtained  the  materials  for  his  account  of  the  stock  specu- 
lations near  the  end  of  that  century. 


CHAPTER  XIH 
THE  CURB  MARKET 

There  seems  to  be  a  strange  affinity  between  stock- 
brokers and  curbstones.  For  nearly  a  century  the  stock- 
market  of  London  was  on  the  sidewalks  and  in  the  cof- 
fee-houses of  'Change  Alley,  and  an  active,  excited  mar- 
ket it  was  at  times.  Guizot,  in  his  account  of  "the  de- 
lirium which  mastered  all  minds"  in  Paris  at  the  time  of 
the  speculation  in  John  Law's  Mississippi  Company,  says 
that  the  street  called  Quincampoix,  for  a  long  time  de- 
voted to  the  operations  of  bankers  and  brokers,  became 
the  usual  meeting-place  of  the  greatest  lords  as  well  as 
of  discreet  burgesses.  It  was  filled  with  excited  throngs 
of  men  all  day.  It  was  found  necessary  to  close  its  two 
ends  with  gates,  which  were  open  from  6  A.  M.  to  9  P.  M. 
Every  house  harbored  business  agents  by  the  hundred, 
and  the  smallest  room  was  let  for  its  weight  in  gold. 
The  street  was  indeed  too  small  for  the  business  crowded 
into  it,  and  the  brokers  were  forced  into  the  Place  V  en- 
dome  and  the  gardens  of  the  Hotel  de  Soissons,  where 
they  put  up  booths  for  the  transaction  of  their  business. 

Born  on  the  Street. — The  New  York  Stock-Market  was 
born  on  the  street.  The  first  dealings  in  securities  were 
under  the  buttonwood  tree  which  stood  in  front  of  68 
"Wall  Street,  and  ever  since  that  time,  except  during 
periods  of  profound  depression,  some  part  of  the  stock- 
market  has  always  been  located  on  the  sidewalks  and 
curbs.  After  deserting  the  shade  of  the  buttonwood  tree 
the  street  brokers  located  themselves  on  Wall  Street 
near  Hanover.  During  the  Civil  War  the  curb  market 
was  in  William  Street,  between  Exchange  Place  and 
Beaver,  and  while  no  record  of  transactions  was  kept,  it 

198 


THE  CURB  MARKET  199 

was  believed  that  the  trading  in  the  street  was  heavier 
than  that  in  the  Exchange.  It  began  at  eight  o'clock  in 
the  morning  and  continued  until  6  P.  M.,  or  even  later, 
and  at  night-time  the  market  was  transferred  to  the 
corridors  of  the  Fifth  Avenue  Hotel.  William  Street  at 
that  time  was  almost  continually  impassable  by  reason 
of  the  crowd  of  brokers. 

The  curb  market  now  has  its  regular  meeting-place  in 
Broad  Street,  between  the  Broad  Exchange  Building  and 
The  Wall  Street  Journal  Building,  and  in  stormy 
weather  the  brokers  often  seek  the  shelter  of  the  cor- 
ridors in  the  various  buildings  in  the  vicinity.  During 
business  hours,  however,  which  last  from  10  A.  M.  to 
3  P.  M.,  a  hundred  or  more  brokers,  most  of  them  young 
and  athletic,  may  be  seen  assembled  in  the  street.  A 
stranger  might  think  that  a  small  sized  riot  had  de- 
veloped, so  lawless  seems  the  conduct  of  these  brokers, 
but  they  are  there  for  a  serious  purpose.  There  is  a 
method  in  their  madness,  and  at  various  times  in  the  last 
ten  years  they  have  transacted  a  large  amount  of  busi- 
ness. In  1899  the  curb  market  assumed  extraordinary 
proportions,  resembling  the  activity  of  the  old  war  times. 
In  1901  the  market  became  less  active,  but  still  quotations 
were  established  for  two  hundred  and  sixty-three  dif- 
ferent stocks  and  bonds.  The  banner  year,  however, 
was  in  1906,  when  the  good  times  enjoyed  by  the  Stock 
Exchange  were  also  in  evidence  on  the  curb.  Prices  for 
bonds  and  stocks  reached  the  highest  levels  of  years. 
For  example  United  Copper,  which,  in  1911,  was  quoted 
at  about  $2  a  share,  sold  in  190G  at  high  as  $77  a  share. 
The  culmination  of  this  period  was  the  panic  of  1907. 

Non-Exchange  Securities. — No  securities  are  traded  in 
that  are  admitted  to  dealings  in  the  Stock  Exchange,  so 
that  many  of  the  Stock  Exchange  houses  have  regular 
representatives  in  the  curb  market.  There  are  many  im- 

15 


200  WORK  OF  WALL  STREET 

portant  issues  dealt  in  on  the  curb,  however,  as  a  number 
of  large  companies  have  not  applied  for  the  listing  of 
their  securities  on  the  Stock  Exchange.  The  curb  market 
is  the  abiding-place  of  stocks  between  the  time  of  their 
issue  and  of  their  listing.  Many  stocks  and  bonds  are 
even  traded  in  before  they  are  issued.  This  was  the  case 
with  the  United  States  Steel  stocks  and  lately  with 
issues  of  the  City  and  Government  bonds.  This  is  in 
reality  dealing  in  hypothetical  securities,  as  trading  is 
done  on  a  basis  of  "  when-as-and-if -issued. "  The  market 
is  divided  up  into  groups,  each  group  dealing  in  a  dif- 
ferent class  of  security.  There  are  six  different  groups, 
known  as  "Coppers,"  "Bonds,"  "Cobalts,"  "Porcu- 
pines," "Industrials,"  and  "Inactive  Industrials."  The 
total  capitalization  of  all  the  companies  whose  securities 
are  traded  in  on  the  curb  amounts  to  the  enormous  sum 
of  about  $500,000,000,  and  the  annual  number  of  bonds 
and  shares  of  stock  dealt  in  average  about  15,000,000. 
Business  since  the  panic  of  1907,  however,  has  been 
largely  of  a  hand-to-mouth  nature. 

Organization. — For  years,  efforts  were  made  to  form 
some  kind  of  an  organization  with  by-laws  and  regula- 
tions for  the  transaction  of  business  on  the  curb,  but  all 
these  endeavors  were  of  no  avail  until  1910  when  the 
late  E.  S.  Mendels,  Jr.,  for  almost  forty  years  the  "dean" 
of  the  curb  market,  succeeded  in  forming  the  New  York 
Curb  Association,  and  this  organization  has  proved  a 
success  from  the  start.  There  are  about  two  hundred  and 
fifty  members  who  pay  annual  dues  of  $100  each.  The 
Association  has  regular  rules  and  regulations  which, 
with  a  few  exceptions,  are  similar  to  those  of  the  Stock 
Exchange.  One  of  the  features  of  the  curb  market,  as 
at  present  organized,  however,  is  that  trading  in  it  is 
not  restricted  to  members.  The  manual  issued  by  the 
Association  says: 


THE  CUES  MARKET  201 

The  New  York  Curb  Market  is  open  to  all  who  choose  to  trade 
there,  but  no  one  is  obliged  to  accept  any  contract  which  is  not 
acceptable.  Strangers  and  others  must  be  properly  identified  in 
justice  to  themselves  and  those  they  attempt  to  trade  with,  and 
they  may  be  called  upon  to  give  up  acceptable  persons  before  the 
contract  is  closed.  This  is  for  the  safety  of  all  concerned. 

The  curb  market  is  one  of  the  most  interesting  fea- 
tures of  Wall  Street.  Every  business  day,  visitors  from 
all  over  the  world  stop  to  watch  the  antics  of  the  traders. 
They  see  varied  colored  caps,  each  color  being  a  dis- 
tinguishing mark  of  a  firm;  they  see  the  traders  signal- 
ing to  near-by  offices  with  their  fingers,  very  much  in 
the  same  manner  that  deaf  and  dumb  persons  "talk"  to 
one  another.  These  signals  are  an  important  part  of  the 
work  of  a  curb  market  trader  and  are  used  extensively 
in  arbitrage  trading  with  curb  markets  and  stock  ex- 
changes in  other  cities.* 

*  See  statement  regarding  curb-market  in  Hughes  Commission 
report. 


CHAPTER  XIV 

THE  INVESTMENT  MARKET 

That  country  is  most  prosperous,  in  the  long  run,  and 
that  people  most  happy,  and  that  government  the  most 
secure  against  war  and  revolution,  in  which  the  great 
majority  of  its  citizens  save  something  out  of  their  in- 
comes for  wise  investment.  Investment  means  provision 
for  the  future.  It  is  insurance  against  sudden  calamities. 
It  is  the  safeguarding  of  wife  and  children.  It  is  the 
reservoiring  of  capital  for  further  national  advance. 

Task  of  Investment. — It  was  said  by  John  Jacob 
Astor  that  he  could  hire  plenty  of  men  competent 
to  collect  the  money  due  him  from  rents  and  other 
sources  of  income,  but  that  it  took  all  of  his  own  time  to 
see  that  his  surplus  income  was  well  invested.  The  safe 
investment  of  money,  by  which  is  meant  the  purchase  of 
securities  or  real  estate  for  permanent  holding,  as  a 
source  of  yearly  revenue,  requires  time,  close  study,  and 
sound  judgment.  Mr.  Astor  thought  that  he  could  de- 
pend only  upon  himself  to  do  this  work.  That  so  many 
mistakes  are  made  in  investing  money  may  be  said,  how- 
ever, to  be  due  either  to  too  much  dependence  upon 
oneself  or  too  much  dependence  upon  others.  A  golden 
mean  is  best.  Not  every  one  can  be  an  Astor. 

As  the  country  grows  richer  and  has  a  larger  surplus 
every  year  over  and  above  the  expenditures  for  living 
expenses,  the  more  difficult  becomes  the  task  of  invest- 
ment, because  the  supply  of  safe  investments  may  not 
keep  pace  with  the  expansion  of  surplus  wealth.  Then 
it  is  that  investors  take  large  risks  buying  securities  of 
the  second  or  third  class.  There  soon  comes  a  point 

202 


THE  INVESTMENT  MARKET  203 

where  investment  itself  becomes  a  mere  speculation, 
when  the  purchase  of  doubtful  securities  outright  be- 
comes more  perilous  than  would  the  buying  of  high-class 
dividend-paying  stocks  on  margin. 

Private  capitalists,  estates,  insurance  companies,  and 
other  corporations  are  constantly  in  the  market  seeking 
investments,  and  while,  as  compared  with  the  speculative 
dealings,  the  investment  business  seems  small,  it  is  in 
reality  very  large  and  is  constantly  expanding.  There 
exists  in  Wall  Street  elaborate  machinery  for  invest- 
ments. There  are  the  great  banking-houses  which  are 
constantly  bringing  out  the  new  securities  issued  by  the 
railroads  and  other  corporations.  There  are  banking- 
houses  which  make  a  specialty  of  the  United  States 
bonds.  These  or  other  firms  also  bid  for  new  issues  of 
State,  county,  and  city  bonds,  which,  if  they  secure  the 
awards,  they  later  sell  over  their  counters  to  investors. 
Many  brokers  in  and  out  of  the  Exchange  confine  them- 
selves exclusively  to  investment  securities;  they  take  no 
margin  accounts  whatever.  There  are  bankers  and 
brokers  who  make  a  specialty  of  different  classes  of 
investment,  as  for  instance  government  bonds  (Federal, 
State,  county  and  city)  ;  railroad  bonds,  equipment 
bonds,  street  railway  bonds,  other  public  service  bonds 
(gas,  water  and  power) ;  and  real  estate  bonds.  Bond 
houses  are  both  buyers  and  sellers  of  investment  se- 
curities, and  they  act  as  advisers  for  and  agents  of  in- 
vestors as  well  as  fiscal  agents  for  corporations.  There 
exists  in  the  Street,  therefore,  every  facility  for  the  sale 
or  purchase  of  high  class  securities.  In  recent  years  the 
big  banks  have  established  bond  departments,  and  these 
are  constantly  expanding  their  activities  and  sales. 

Here  also  comes  every  doubtful  new  scheme  and  enter- 
prise seeking  money  for  its  promotion  and  offering  stocks 
and  bonds  galore  to  investors.  The  promoter  flourishes 


204  WORK  OF  WALL  STREET 

in  the  Street  in  every  form,  and  the  investor  must  learn 
to  distinguish  between  the  reputable  investment  firm  and 
the  irresponsible  seeker  after  other  people's  money. 
There  are  so  many  high  class  houses  that  no  one  ought 
to  be  deceived. 

Standard  investment  securities  are  subject  to  fewer 
fluctuations  in  prices  than  speculative  stocks,  and  they 
are  less  liable  to  manipulation  and  temporary  influence. 
Permanent  elements  of  value  more  than  transient  condi- 
tions of  the  market  govern  their  price. 

Conditions  of  the  Problem. — The  "Wall  Street  man 
studies  an  investment  from  five  standpoints : 

1.  Its  yield  in  interest  or  dividend,  for  the  object  of 
investment  is  income. 

2.  Its  security,  for  the  safeguarding  of  the  principal  is 
the  first  consideration  in  the  placing  of  money  in  an 
income  producing  bond. 

3.  Its  duration,  .for  the  investor  naturally  prefers  a 
security  having  a  long  time  to  run  before  maturity. 

4.  Its  marketability,  for  the  investor  prefers  that  se- 
curity which  can  most  easily  be  sold  in  case  he  is  com- 
pelled to  part  with  it,  and  which  can  most  readily  be  ac- 
cepted by  a  bank  in  case  it  is  offered  as  security  for  a 
loan. 

5.  Its  taxation,   for  the  investor  prefers  that  bond 
which  is  either  exempt  from  taxation,  or  which  is  sub- 
ject to  slight  taxation.     Under  a  1911  law,  all  "  secured 
debts"  can  now  be  made  exempt  from  personal  taxation 
in  New  York  State  by  paying  a  registration  fee  of  £  of 
one  per  cent,  or  $5  per  $1000  bond. 

A  bond  to  command  the  highest  price  must  pay  a  fair 
rate  of  interest,  be  of  undoubted  security,  and  have  a 
long  period  to  run.  It  may  pay  6  per  cent,  a  year  and 
yet  be  of  doubtful  safety  or  of  inferior  standing,  like 
a  third  mortgage  or  income  bond.  Or  it  may  pay  6 


THE  INVESTMENT  MARKET  205 

per  cent,  and  be  a  first-class  mortgage  on  a  property  of 
known  value,  and  yet  have  only  two  or  three  years  to 
run.  In  either  of  these  cases  its  value  as  an  investment 
would  be  much  impaired,  and  a  4-  or  41/2-per  cent,  bond 
issued  by  a  leading  corporation  on  undoubted  security, 
and  having  a  long  period  of  years  to  run,  would  com- 
mand a  higher  price. 

Rate  of  Interest. — A  generation  ago  even  a  high-class 
security  had  to  pay  as  much  as  7  per  cent,  a  year  in  order 
to  command  a  sale,  but  now  American  interest  rates  have 
declined  to  the  level  of  those  of  Europe.  In  1865  the 
Government  paid  over  7  per  cent,  interest  on  $671,000,000 
of  its  debt,  6  per  cent,  on  $1,213,000,000,  5  per  cent,  on 
$245,000,000,  and  4  per  cent,  on  only  $90,000,000.  To-day 
one-half  of  the  outstanding  bonds  of  the  United  States 
pay  only  2  per  cent,  interest. 

It  is  a  rule  that  the  more  secure  an  investment  the 
lower  its  rate  of  interest.  If  an  absolutely  safe  invest- 
ment pays  a  high  rate  of  interest  or  dividend,  it  com- 
mands a  premium  which  reduces  the  actual  return  on  the 
investment  to  a  level  with  the  prevailing  rates  for  se- 
curities of  that  class. 

The  premium  is  the  price  paid  for  a  security  over  and 
above  its  par  value.  Thus,  a  United  States  4-per-cent. 
bond  due  1925,  selling  at  140,  pays  4  per  cent,  on  its 
par  value  of  100;  at  140  it  would  yield  to  its  holder 
2.86  per  cent.  The  calculation  of  bond  values  involves 
an  intricate  mathematical  problem,  which,  however,  can 
be  avoided  by  the  use  of  tables  prepared  by  actuaries. 

The  bond  houses  become  expert  not  only  in  estimating 
what  is  the  theoretical  value  of  a  security  as  determined 
by  its  safety,  its  interest,  its  duration,  and  its  taxation, 
but  also  as  to  its  probable  market  price,  as  governed 
by  the  supply  of  investment  money  and  other  conditions. 
These  houses  are  prominent  as  bidders  for  State  and  city 


206  WORK  OF  WALL  STREET 

bonds.  They  will  sometimes  bid  for  an  entire  issue  at  a 
certain  premium,  and  retail  the  same  to  investors  at  a 
higher  price.  All  this  requires  close  calculation  and  a 
sound  judgment. 

Instead  of  7  per  cent,  being  the  standard  rate  of  in- 
terest on  a  safe  investment,  as  it  was  a  generation  ago, 
3£  to  4  per  cent,  may  now  be  said  to  be  more  nearly  the 
earning  power  of  money  when  invested  in  a  gilt  edged 
security.  The  higher  the  rate  of  interest  rises  above 
4  per  cent,  the  less  the  security  of  the  principal  becomes, 
though  the  greater  cost  of  living  makes  for  an  advancing 
level. 

Different  Classes  of  Investments. — Investments  may  be 
divided  into  the  following  general  classes : 

1.  The    woman's   investment,   in  which   absolute   se- 
curity is  the  first  consideration; 

2.  The  savings  bank,  the  insurance  company  and  the 
trustee's  or  executors'  investment,  in  which  the  security 
purchased  must  be  of  a  "gilt-edged"  description,  that  is, 
possessing  a  high  degree  of  security  and  meeting  every 
requirement  of  a  first  class  investment. 

3.  The   business  man's  investment,  which  may  pos- 
sess a  considerable  speculative   quality,  requiring  such 
attention  upon  the  part  of  an  investor  as  a  keen  business 
man  is  able  to  give  to  his  daily  affairs,  but  which  affords 
a  larger  return  upon  the  money  and  the  possibility  of  an 
advance  in  price. 

4.  The  speculative  investment,  in  which  both  the  risk 
and  the  possible  return  are  greater,  and  which  is  bought 
not  primarily  for  present  income  but  more  for  future 
profit. 

Some  bond  houses  make  a  specialty  of  one  or  the  other 
of  these  classes  of  securities,  but  many  deal  in  all. 

Selling  Bonds. — In  a  sense  Wall  Street  is  a  manufac- 
tory of  securities;  and  like  other  manufacturers  it  em- 
ploys every  means  for  finding  a  market  for  its  products. 


THE  INVESTMENT  MARKET  207 

Many  of  the  bond  houses  employ  expert  salesmen  who 
go  out  on  the  road,  and  personally  interview  bank  offi- 
cials and  individual  investors,  explain  the  merits  of  the 
security  they  offer  and  seek  to  secure  orders.  This 
process  does  not  materially  differ  from  that  of  the 
"drummer"  of  a  dry  goods  jobbing  firm.  Bond  houses 
also  send  out  letters  and  circulars  by  the  thousand  to 
selected  lists  of  investors,  and  these  letters  and  circulars 
are  often  very  ably  written. 

Intelligent  advertising  of  investment  securities  has  in 
recent  years  grown  to  enormous  proportions.  The 
placing  on  the  market  of  a  big  new  issue  of  securities 
is  often  preceded  or  accompanied  by  an  elaborate  and 
costly  educational  campaign  by  the  medium  of  adver- 
tising; while  the  ordinary  daily  business  of  marketing 
bonds  is  similarly  facilitated.  Firms  of  expert  adver- 
tising men  aid  in  the  intelligent  placing  of  these  adver- 
tisements, while  some  investment  houses  have  a  special 
advertising  adviser  of  their  own.  The  scientific  employ- 
ment of  publicity  methods  has  become  almost  a  fine  art. 
The  best  advertising  in  the  long  run  is  that  which  tells, 
in  an  attractive  way,  the  exact  truth  and  which  will  use 
no  newspaper  or  magazine  that  accepts  dubious,  or  tip- 
sters' "ads."  Many  of  the  magazines  of  large  circula- 
tion have  established  investment  departments  employing 
able  financial  writers  to  answer  subscribers'  inquiries 
in  regard  to  securities;  and  in  this  and  other  ways 
the  public  is  gradually  obtaining  an  investment  educa- 
tion. 

Many  of  the  bond  houses  moreover  establish  elaborate 
statistical  departments  containing  the  very  latest  in- 
formation in  regard  to  every  development  in  the  railroad, 
industrial,  mercantile  and  political  world,  and  the  statis- 
tical departments  are  not  only  an  aid  to  the  houses  in 
selling  securities  but  also  materially  assist  their  cus- 
tomers in  arriving  at  a  sound  judgment  as  to  values. 


208  WORK  OF  WALL  STREET 

The  large  investor  makes  an  intelligent  distribution  of 
his  investments,  not  tying  up  all  his  surplus  in  one  se- 
curity or  in  one  locality  or  even  in  one  country.  Invest- 
ment has  now  become  an  international  business.  The 
capitalists  of  England  and  France  have  literally  thou- 
sands of  millions  of  dollars  invested  outside  of  their  own 
countries;  and  even  in  the  United  States,  notwithstand- 
ing our  own  vast  territory,  the  resources  of  which  are 
not  yet  fully  developed,  we  are  now  exporting  considera- 
ble capital.  The  big  bond  merchant,  therefore,  must  in 
his  touch  upon  world  affairs  become  a  good  deal  of  a 
statesman  as  well  as  a  financier.  The  wise  distribution 
of  risks  is  a  science. 

There  are  large  daily  sales  of  bonds  in  the  Stock  Ex- 
change ;  and  it  is  therefore  a  distinct  advantage  to  be 
listed,  for  its  marketability  as  well  as  its  negotiability 
as  security  for  loans  is  thereby  increased.  But  the  sales 
of  bonds  "over  the  counter"  as  the  phrase  is,  are  even 
larger. 

REFERENCES 

"A  Plain  Guide  to  Investment  and  Finance,"  T.  E.  Young,  1908. 
"Stock  Exchange  Securities,"  Sir  Robert  Giffen,  1877. 
"Stock  Exchange  Investments,"  1900. 
"Specimens  of  Investment  Securities  for  Class-room   Use,"  Wm. 

G.  Surnner,  1901. 

"American  Railways  as  Investments,"  Carl  Snyder. 
"Art  of  Wall  Street  Investing,"  John  Moody,  1906. 
"Investment  Bonds,"  F.   Lownhaupt,   1908. 
"Bonds  as  Investment  Securities,"  Annals  of  American  Academy, 

1907. 

"Investments:  What  and  When  to  Buy,"  R.  W.  Babson,  1908. 
"Art  of  Investing,"  i888. 
"Anatomy  of  a  Railroad  Report,"  Thomas  F.  Woodlock,  1900. 


CHAPTER  XY 
THE  BROKER  AND  HIS  OFFICE 

A  generation  or  two  ago — and  especially  when  Henry 
Adams  wrote  his  account  of  the  ' '  Gold  conspiracy ' '  busi- 
ness and  political  morals  in  New  York  were  at  a  very 
low  ebb,  and  he  described  a  broker  as  a  gambler ;  *  but 
even  in  the  earlier  days  of  Wall  Street  there  were  op- 
posing views  of  the  character  and  position  of  the  stock 
broker.  One  regarded  him  as  a  rogue  and  another  as  a 
gentleman.  All  business,  including  that  of  the  Stock  Ex- 
change broker,  has  improved  in  ideals  and  methods  in 
recent  years,  and  there  would  not  now  be  such  a  differ- 

*  "Jay  Gould  was  a  broker,  and  a  broker  is  almost  by  nature  a 
gambler,  perhaps  the  very  last  profession  suitable  for  a  railway 
manager.  In  speaking  of  this  class  of  men  it  must  be  fairly  as- 
sumed at  the  outset  that  they  do  not  and  cannot  under- 
stand how  there  can  be  a  distinction  between  right  and  wrong 
in  matters  of  speculation,  so  long  as  the  daily  settlements  are  punc- 
tually effected.  In  this  respect  Mr*~Gould  was  probably  as  honest 
as  the  mass  of  his  fellows,  according  to  the  moral  standard  of  the 
Street,  but  without  entering  upon  technical  questions  of  roguery,  it 
is  enough  to  say  that  he  was  an  uncommonly  fine  and  unscrupulous 
intriguer,  skilled  in  all  the  processes  of  stock  gambling,  and  pass- 
ably indifferent  to  the  praise  or  censure  of  society." 

HENRY  ADAMS  in  1870. 

"As  a  body,  the  brokers  are  honorable  men.  When  they  make 
a  bargain  they  will  stand  to  it.  Much  has  been  said  and  written 
against  brokers,  but  they  are  about  the  only  class  of  men  that  will 
not  back  out  of  a  bad  bargain." 

"The  stock-broker  is  a  gentleman  by  birth  and  education,  a  gen- 
tleman in  manners  and  habits,  a  gentleman  in  all  the  various  rela- 
tions of  life — even  to  keeping  his  trotting  horse,  having  a  box  at 
the  opera  and  a  pew  in  the  church.  The  stock-broker  is  a  scholar 
too.  Some  are  historians;  some  novel  writers,  and  some  are  poets. 
Some  are  members  of  the  medical  faculty;  some  are  deacons  in 
churches;  some  are  politicians;  some  diplomatists.  By  nature  the 
stock -broker  is  a  talker,  yet  he  knows  when  to  hold  his  tongue. 
He  will  talk  about  everybody's  business  but  his  own." — Hunt's 
Merchants'  Magazine,  June  and  July,  1849. 

209 


210  WORK  OF  WALL  STREET 

ence  of  opinion  as  that  exhibited  in  the  quotations  given 
in  the  foot  notes.  It  is  true,  however,  of  the 
broker  as  it  is  of  the  banker  and  the  merchant  that  his 
position  in  the  community  depends  upon  himself.  If  he 
is  a  good  broker,  he  stands  on  a  level  with  every  other 
self-respecting  business  man.  If  he  is  a  bad  broker,  his 
opportunities  for  mischief  are  infinite. 

Middleman. — The  broker  is  the  connecting  link  be- 
tween buyers  and  sellers.  He  is  a  middleman,  one  who 
negotiates  sales  or  contracts  as  an  agent.  The  word 
broker  is  old.  The  early  English  form  was  "broceur." 
By  some  it  is  believed  to  be  derived  from  the  Saxon 
word  "broc,"  which  meant  misfortune;  and  the  first 
brokers  indeed  appear  to  have  been  men  who  had  failed  in 
business  as  principals  and  been  compelled  to  pick  up  a 
precarious  living  as  agents.  There  are  almost  as  many 
different  kinds  of  brokers  as  there  are  lines  of  business. 
In  Wall  Street  alone  there  are  stock-brokers,  investment- 
brokers,  curb-brokers,  two-dollar  brokers,  grain-brokers, 
cotton-brokers,  coffee-brokers,  ship-brokers,  insurance- 
brokers,  money-brokers,  foreign-exchange  brokers,  bond- 
brokers  ;  and  there  are  large  houses  which  combine  nearly 
all  these  different  kinds  of  brokerage. 

The  stock-broker  is  usually  a  man  possessed  with  a 
superior  endowment  of  brains.  No  fool  can  last  long  in 
the  Stock  Exchange.  The  broker,  whether  he  is  the  office 
partner  or  the  Board  member,  requires  alertness,  a  habit 
of  quick  decision,  accuracy,  promptness,  the  ability  to 
take  large  risks  with  good  judgment  and  to  read  char- 
acter readily,  and  a  capacity  of  keeping  cool  in  times  of 
excitement.  He  must  never  lose  his  head,  as  the  say- 
ing is. 

Breadth  and  Narrowness. — The  broker  is  narrow  in  the 
sense  that  he  looks  at  everything  through  Wall  Street 
spectacles.  A  thing  is  good  or  bad,  wise  or  foolish,  just 


THE  BROKEK  AND  HIS  OFFICE  211 

as  it  happens  to  affect  the  immediate  interest  of  the 
Street.  If,  for  instance,  the  market  is  depending  upon 
a  United  States  Supreme  Court  decision,  the  broker  can 
not  see  why  the  decision  is  delayed.  If  there  is  a  strike 
in  the  coal  fields,  he  cannot  see  why  the  operators  and 
miners  should  be  so  inconsiderate  as  to  disturb  the  prices 
of  stocks.  He  is  impatient  of  any  consideration  other 
than  that  of  his  own  interest.  Still,  that  is  a  trait  of 
human  nature  by  no  means  confined  to  Wall  Street. 
But  the  broker  is  broad  in  another  sense.  The  "Wall 
Street  horizon  is  almost  as  wide  as  the  world  itself. 

"The  operators  in  the  gold  room,"  wrote  Horace  White 
in  his  account  of  the  gold  speculation  of  the  war  time, 
"  should  be  at  the  same  time  the  best  informed  and  the 
most  intelligent  business  men  in  the  country.  They  must 
have  not  only  the  best  and  latest  information,  but  they 
must  be  able  to  determine  at  once  what  is  the  economic 
meaning  and  significance  of  any  given  fact  which  may 
come  to  their  knowledge.  They  must  be  able  to  resolve 
the  most  complicated  problems  in  mental  arithmetic 
without  a  moment's  hesitation.  If  the  Secretary  of  the 
Treasury  has  decided  upon  a  certain  measure  of  financial 
policy,  or  the  President  upon  a  certain  measure  of  foreign 
policy ;  if  there  is  a  short  corn  crop,  or  a  Fenian  rebellion, 
a  war-cloud  in  Europe,  or  a  heavy  immigration,  or  a 
great  oil  discovery,  or  a  change  in  the  tariff,  or  anything 
else  which  can  affect  the  currency  or  the  public  credit, 
they  must  be  able  to  melt  down  the  mass  and  weigh  the 
product  in  terms  of  standard  gold.  This  is  the  work  of 
omniscience.  No  man  can  do  it." 

Yet  Mr.  White's  characterization  of  the  task  of  the 
gold-broker  of  a  generation  ago  serves  well  to  describe 
the  work  of  the  stock-broker  of  to-day.  He  must  keep 
in  touch  with  every  market  abroad  as  well  as  at  home. 
He  must  know  something  of  the  significance  of  par- 


212  WORK  OF  WALL  STREET 

liamentary  debates  and  congressional  legislation.  He 
studies  bank  statements,  railroad  reports,  crop  estimates, 
statistics  of  foreign  trade,  and  the  forces  at  work  in 
domestic  and  international  politics.  As  he  must  give  ad- 
vice which  may  make  or  lose  money  for  his  customers, 
he  is  obliged  to  keep  an  intelligent  watch  on  everything 
of  importance  that  is  going  on.  As  he  is  not  omniscient, 
he  often  makes  mistakes.  But  his  grasp  of  the  world's 
affairs  is  firmer  than  that  of  most  other  observers. 

The  broker  is  usually  a  gentleman  and  dresses  well 
and  lives  well.  Sometimes  he  is  something  more  than  a 
broker,  and  becomes  a  power  outside  of  his  own  class. 
Brayton  Ives,  a  former  President  of  the  Exchange,  be- 
came a  noted  collector  of  books.  Another  President,  A. 
S.  Hatch,  was  a  well-known  worker  in  church  missions. 
Still  another  President,  J.  Edward  Simmons,  was  Presi- 
dent of  the  Board  of  Education  and  later  of  the  Cham- 
ber of  Commerce.  Another  President,  James  D.  Smith, 
was  Commodore  of  the  New  York  Yacht  Club.  S.  V. 
White,  besides  being  a  broker,  was  a  member  of  the  bar 
of  the  Supreme  Court,  and  served  in  Congress.  Stedman 
was  a  poet.  R.  P.  Flower  was  Governor  of  the  State. 
Bird  S.  Coler  served  as  Comptroller  of  the  city.  On  the 
whole,  brokers  as  a  class  compare  well,  mentally  and 
morally,  with  other  business  men.  They  are  always  pa- 
triotic, if  for  no  other  motive  than  that  of  self-interest, 
for  if  the  Government  went  down  or  suffered  from  do- 
mestic revolt  or  foreign  invasion,  the  whole  structure 
of  Wall  Street  credits  and  values  would  collapse  like  a 
house  of  cards.  During  the  Civil  War  the  Exchange 
would  not  admit  as  member  anyone  suspected  of  aiding 
in  the  rebellion.  The  broker  is  proverbially  generous. 
When  he  makes  money  fast,  he  spends  it  freely,  and  his 
contributions  to  charity  are  liberal. 

Relations  to  Customers. — As  regards  their  relations  to 


THE  BROKER  AND  HIS  OFFICE  213 

customers,  brokers  may  be  divided  into  two  classes :  first, 
those  who  do  a  strictly  commission  business  and  who  are 
conservative  in  advice  and  dealings;  and  second,  those 
who  speculate  on  their  own  account  as  well  as  for  their 
customers,  who  advise  the  taking  of  long  chances,  and 
who  too  often  are  bulls  at  top  prices  and  bears  at  the 
bottom.  It  is  needless  to  say  that  a  wise  choice  of  a 
broker  is  the  first  duty  of  one  who  is  entering  into  the 
stock-market. 

It  is  equally  true  that  the  broker  should  make  a  wise 
choice  of  a  customer ;  for  the  connection  between  brokers 
and  customers  is  as  delicate  as  that  between  attorneys 
and  clients.  Indeed,  some  brokers  use  the  word  clients 
in  speaking  of  their  customers.  If  the  customer  is  mean 
and  unscrupulous,  he  can  make  much  trouble  and  loss 
for  his  broker.  It  is  by  no  means  uncommon  for  a  cus- 
tomer to  abandon  his  broker  in  time  of  panic  to  bear 
the  loss  which  is  properly  his  own.  Strictly  speaking, 
the  broker  is  simply  the  agent  for  his  customer.  The 
latter  is  the  owner  of  every  share  of  stock  bought  for 
him  by  the  broker,  although  the  broker  is  the  actual 
holder  of  the  stock.  He  holds  it  as  security  for  the  loan 
which  he  makes  to  the  customer  upon  it.  On  every 
$10,000  purchase  the  customer  puts  up  $1,000  cash.  The 
broker  advances  the  remaining  $9,000  and  charges  the 
customer  interest,  holding  the  stock  as  security  for  the 
loan.  The  customer's  right  in  the  stock,  it  has  been 
legally  determined,  is  "the  right  of  redemption."  He  is 
entitled  to  receive  the  stock  bought  the  moment  he  pays 
the  balance  due  upon  it.  Moreover,  he  is  entitled  to  all 
the  dividends  upon  the  stock  accruing  after  the  purchase, 
although  the  stock  is  in  the  possession  of  the  broker, 
who  may  hold  the  same  on  the  books  of  the  company  in 
his  own  name.  The  broker  has  the  right  to  demand  more 
margin  from  his  customer,  and  if  this  margin  is  not 


214  WORK  OF  WALL  STREET 

forthcoming,  after  due  oral  or  written  notice,  the  broker 
can  sell  the  stock  for  the  account  of  the  customer.  What 
is  "due  notice"  may  depend  upon  circumstances. 

Rehypothecation. — The  necessities  of  the  stock-market 
require  the  broker  to  do  some  things  which,  in  a  strict 
construction  of  law,  it  might  be  difficult  to  uphold  in 
the  courts.  For  instance,  when  the  broker  pledges  the 
stock  he  holds  for  his  customer  as  security  for  a  loan  at 
a  bank,  that  is  rehypothecation.  Moreover,  it  is  a  general 
principle  of  law  that  an  agent  employed  to  do  a  certain 
thing  can  not  employ  another  agent  to  do  it  for  him. 
Yet  it  is  a  common  and  recognized  practice  for  brokers 
to  employ  other  brokers.  The  man  who  opens  an  ac- 
count with  a  broker  tacitly  agrees,  however,  to  conform 
to  the  customs  of  the  stock-market.  He  is  willing  to 
take  advantage  of  the  mechanism  the  Street  has  created 
for  the  transaction  of  its  business,  and  must  therefore  not 
raise  technical  objections  to  its  methods.  Some  brokers 
have  an  agreement  with  their  customers  that  "accounts 
will  be  carried  on  margin  according  to  the  rules  of  the 
New  York  Stock  Exchange  and  its  members,  with  au- 
thority to  loan  or  pledge  the  securities  carried  in  bulk  or 
otherwise  for  such  sums  as  we  may  see  fit. ' ' 

Eliot  Norton,  of  the  New  York  bar,  in  a  treatise  on 
stock-trading  from  the  legal  standpoint,  says  that  when  a 
customer  gives  an  order  to  a  broker  it  is  a  proposition 
to  make  the  broker  his  agent  to  contract  to  buy  or  to 
sell,  according  to  the  rules  and  customs  of  the  Stock 
Exchange,  such  securities  as  are  specified  in  the  order. 

The  Big  Commission  Houses. — Let  us  now  step  into  a 
broker's  office  and  see  what  it  looks  like,  and  perhaps 
open  an  account.  There  are  brokers  who  have  only  one 
customer  or  two,  although  the  business  of  these  two  may 
be  large  enough  to  occupy  his  entire  energies.  There 
was  a  time  not  so  many  years  ago  when  a  customer  who 


THE  BROKER  AND  HIS  OFFICE  215 

carried  a  line  of  thirty  thousand  shares  would  be  the  talk 
of  the  Street,  but  in  recent  years  operations  have  ex- 
panded, and  a  line  of  one  hundred  thousand,  and  even 
one  hundred  and  fifty  thousand  shares  a  day,  has  been 
not  uncommon.  There  are  brokers  with  small  offices 
and  only  two  or  three  clerks,  and  others  who  hire  only 
desk  room  and  clear  their  business  through  other  mem- 
bers; but  the  office  into  which  the  reader  is  conducted 
is  one  of  the  larger  commission  houses,  that  carry  several 
hundreds  of  accounts,  and  lease  private  telegraph  wires 
connecting  with  branch  offices  uptown  and  in  other  cities. 
These  houses  transact  a  general  banking  as  well  as  broker- 
age business.  They  receive  deposits  of  money,  and  make 
loans  as  well  as  buy  and  sell  securities.  They  have  two 
or  three  Board  members,  and  in  addition  often  employ 
other  brokers.  They  may  have  representatives  on  the 
Cotton,  Produce,  and  Coffee  Exchanges,  and  buy  and  sell 
wheat,  corn,  cotton,  and  coffee  on  margins  and  for  com- 
missions the  same  as  they  do  stocks.  They  employ  a 
large  staff  of  clerks,  and  their  annual  expenses  range 
from  $60,000  to  $150,000  and  even  more. 

As  we  enter  the  extensive  offices  of  one  of  these  large 
houses  we  are  confronted  with  an  arrangement  of  glass 
or  wood  partitions  and  windows,  very  much  like  a  bank. 
Here  are  windows  marked  "Cashier,"  "Deliveries," 
"Comparisons,"  "Telegrams,"  and  the  like,  and,  looking 
through  or  over  the  partitions,  we  see  bookkeepers  and 
clerks  at  work.  The  main  principles  of  bookkeeping  are 
the  same  in  any  business,  but  a  broker's  office  requires  a 
line  of  books  and  blanks  peculiar  to  its  special  needs. 

Here  at  one  side  is  a  door  marked  "Customers,"  and 
through  this  we  enter  a  large  apartment  resembling  the 
library  of  a  private  residence  more  than  a  business  office. 
The  floor  is  carpeted.  On  the  walls  hang  oil-paintings 
or  interesting  engravings  and  etchings-.  There  are  up- 
16 


216  WORK  OF  WALL  STREET 

bolstered  chairs  and  couches.  There  are  costly  Oriental 
rugs.  There  are  desks  with  writing  material,  tables  on 
which  are  found  news  slips  and  the  latest  financial  jour- 
nals, a  rack  containing  files  of  the  Journal  of  Com- 
merce and  other  daily  newspapers,  a  bookcase  holding 
bound  volumes  of  the  Financial  Chronicle,  copies  of 
"Poor's  Manual"  for  a  series  of  years,  and  other  books 
of  reference.  On  one  side  are  private  offices  of  members 
of  the  firm.  On  the  other,  reaching  across  the  wall,  is  a 
board  containing  movable  blocks  of  figures  with  which 
boys  are  posting  the  quotations  of  stocks,  grain,  and 
cotton  as  fast  as  they  come  out  over  the  tickers.  Groups 
of  customers  sit  in  the  chairs,  their  eyes  intent  on  the 
board,  where  they  are  able  to  see  at  a  glance  the  ever- 
changing  position  of  the  great  market.  It  is  like  looking 
through  a  huge  kaleidoscope,  such  is  the  constant  move- 
ment of  prices.  Not  all  the  large  offices  have  this  ar- 
rangement of  quotation  boards,  but  many  of  them  do. 
The  tickers,  of  course,  are  indispensable  adjuncts  of 
every  office. 

As  we  enter  this  place  we  are  conscious  at  once  of  a 
strange  environment.  If  we  have  never  before  been  in 
the  speculative  arena,  it  is  as  if  we  had  suddenly  entered 
into  a  new  country.  Here  is  a  babel  of  voices;  we  hear, 
but  understand  not.  The  language  seems  to  be  English, 
but  we  might  as  well  be  listening  to  Chinese.  It  will  be 
some  time  before  we  thoroughly  comprehend  the  argot  of 
the  broker's  office. 

We  will  suppose  that  we  have  entered  this  office  not 
merely  from  curiosity.  We  have  heard  the  stories  of 
marvelous  gains  achieved  in  the  stock-market,  and  we 
are  moved  to  make  an  investment.  So  we  ask  to  see 
a  member  of  the  firm.  The  office  partner  greets  us.  The 
typical  broker  is  courteous  in  his  manner,  but  quick  and 
terse  in  his  language,  sharp  in  the  glance  with  which  he 


THE  BROKER  AND  HIS  OFFICE  217 

comprehends  us,  and  giving  the  impression  of  intense 
nervous  force.  We  tell  him  that  we  wish  to  open  an 
account,  and  ask  his  terms  and  advice. 

Introduction. — Now,  no  one  can  make  a  deposit  at  a 
bank  without  a  reference,  and  no  one  can  open  an  ac- 
count with  a  broker  without  an  introduction,  or  some 
description  of  oneself  that  will  take  the  place  of  a  per- 
sonal introduction.  Name,  address,  and  business  must 
be  made  known.  The  broker  must  be  satisfied  as  to  the 
customer's  standing  before  he  will  accept  his  business. 
In  this  case  we  say  that  we  keep  a  deposit  at  such  and 
such  a  bank,  and  refer  to  its  President  or  Cashier.  No 
better  reference  could  be  given.  The  broker  may  now 
acquaint  us  with  the  rule  of  the  Exchange  governing 
commissions,  and  the  custom  of  the  Street  as  to  margins 
and  hypothecations  of  securities.  He  takes  our  signature 
and  we  make  a  deposit  varying  with  the  size  of  the 
order  we  intend  to  give  and  the  kind  of  security  we  pur- 
pose to  deal  in.  Having  complied  with  the  terms  of  the 
broker,  we  are  fairly  launched  on  the  sea  of  speculation, 
or,  as  one  "Wall  Street  man  naively  says,  "fairly  engaged 
in  the  business  of  losing  money." 

Brokers'  Advice. — Most  men  enter  Wall  Street  with  a 
predetermined  idea  of  what  they  want  to  do.  They  have 
some  tip  or  information  in  regard  to  some  particular 
stock  or  some  theory  as  to  the  movement  of  prices.  In 
fact,  many  outsiders  disregard  their  brokers'  advice  alto- 
gether, and  generally  suffer  by  so  doing.  But  let  it  be 
understood  that  we  are  a  "lamb"  or  a  novice,  in  igno- 
rance of  the  market,  and  that  we  place  ourselves  unre- 
servedly in  the  broker's  hands.  We  ask  him  to  take  our 
money  and  invest  it  for  us.  He  flatly  refuses.  "We 
take  no  discretionary  orders,"  he  says.  A  discretionary 
order  is  one  in  which  the  broker  is  given  authority  to 
buy  or  sell  whatever  stock  he  pleases  at  any  price,  the 


218  WORK  OF  WALL  STREET 

customer  relying  on  his  honor  and  judgment  to  yield 
him  a  profit.  Discretionary  orders  and  pools  are  com- 
mon enough  in  Wall  Street,  but  few  Stock  Exchange 
houses  will  have  anything  to  do  with  them.  Disap- 
pointed in  this,  we  now  ask  for  advice. 

No  two  brokers  adopt  exactly  the  same  policy  in  re- 
gard to  advising  customers.  Some  are  very  conservative 
about  doing  so.  Others  give  advice  freely.  In  this  case 
the  broker  says  something  like  this:  "The  Air  Line 
stock  looks  cheap;  it  has  paid  5  per  cent,  now  for  two 
years,  and  its  statements  of  earnings  show  steady  gains 
from  week  to  week.  Its  capitalization  is  less  per  mile 
than  that  of  the  Straight  Western  Line,  which  earns  no 
more  and  yet  is  selling  twenty  points  higher.  It  is  be- 
ginning to  advance  on  what  seems  to  be  good  buying. 
I  am  advising  my  customers  to  buy." 

The  Order. — We  are  immediately  consumed  with  an  in- 
tense eagerness  to  buy  Air  Line,  and  although  we  have 
no  idea  where  the  Air  Line  is,  we  say  that  we  will  take 
two  hundred  shares.  The  broker  then  directs  us  to  fill 
out  an  order  blank  as  follows: 

NEW  YORK,  March  1. 
RICHARD  ROE  &  COMPANY,  Bankers: 

Buy  for  iny  account  and  risk  200  Air  Line  at  103. 

JOHN  DOE. 

This  order  is  immediately  telephoned  to  the  Exchange, 
where  the  Board  member  proceeds  to  execute  it.  In  the 
meantime  we  take  our  seat  among  the  other  customers, 
and  finding  Air  Line  on  the  quotation  board,  anxiously 
watch  the  movement  of  its  price. 

As  soon  as  the  broker  has  bought  the  stock  he  serves 
us  with  a  notice  like  this  : 

NEW  YORK,  March  1. 
JOHN  DOE,  Esq., 

SIR:  We  have  bought  for  your  account  and  risk  200  Air  Line 
at  103.  RICHARD  ROE  &  COMPANY. 


THE  BROKER  AND  HIS  OFFICE  219 

The  name  of  the  broker  from  whom  the  stock  is  pur- 
chased is  also  generally  given. 

In  three  or  four  days,  it  may  be,  we  are  delighted  to 
see  the  stock  quoted  at  108,  when  the  broker  calls  us  to 
him  and  suggests  the  propriety  of  our  taking  the  present 
profit  and  selling.  "Money  is  getting  tighter,"  he  says; 
"the  bank  statement  to-morrow  is  likely  to  be  bad.  The 
market  looks  top-heavy.  Your  stock  is  comparatively 
low,  but  it  will  be  affected  by  the  general  decline.  I 
advise  a  sale."  So  we  write  another  order  to  sell  the 
two  hundred  shares  at  market  price,  and  presently  are 
informed  that  they  have  been  sold  at  107^.  It  may  be 
said  here  that  in  giving  orders  to  buy  or  sell,  if  no  price 
is  named,  it  is  always  understood  to  be  at  "the  market." 

Statement  of  Account. — We  now  ask  for  a  statement 
of  our  account,  and  find  that  the  transaction  stands  like 
this :  two  hundred  shares  at  103  cost  $20,600.  The  broker 
obliged  us  to  deposit  10  per  cent,  margin,  or  $2,060. 
Then  in  four  days  we  sell  at  107^,  or  $21,500.  Our  profit 
is  $900  on  an  investment  of  $2,060,  or  nearly  44  per  cent. 
But  from  this  the  broker  will  deduct  his  commission  of 
$25  on  the  purchase  and  $25  on  the  sale,  and  will  charge 
us  the  prevailing  rate  of  interest  on  $20,600  for  the  four 
days  he  carries  the  two  hundred  shares  for  us,  allowing 
us,  however,  interest  on  the  amount  of  our  deposit  of 
$2,060. 

Frequently  an  operator,  in  order  to  limit  the  amount 
of  possible  loss,  will,  in  giving  an  order  to  buy,  say  at 
110,  specify  that  in  case  the  price  drops,  say  to  106,  the 
broker  shall  sell  without  further  delay.  This  is  what  is 
called  a  "stop  order."  Bear  operators  sometimes  raid 
the  market — that  is,  sell  it  freely — in  order  to  depress 
prices  to  a  point  where  stop  orders  will  be  reached.  This 
will  force  liquidation,  and  the  bears  are  then  able  to 
cover  their  sales  at  a  profit. 


220  WORK  OF  WALL  STREET 

Margins. — The  amount  of  margins  demanded  by  a 
broker  depends  on  the  character  of  the  security  traded 
in.  An  active  stock  that  has  a  ready  market  is  safe  to 
carry  on  ten  points  margin — that  is  to  say,  at  10  per  cent, 
of  the  market  price — while  one  that  has  little  or  no 
market  is  unsafe  to  carry  on  twenty-five  points  margin. 
There  are  brokers  who,  in  their  eagerness  to  get  business, 
will  take  large  risks  by  carrying  stocks  on  slender  mar- 
gin, but  a  well-conducted  office  will  thoroughly  safeguard 
itself  by  demanding  a  sufficient  margin  in  every  case. 
If  after  buying  a  stock  its  price  declines,  the  broker  will 
call  for  more  margin. 

The  question  has  often  been  raised  whether  brokers 
should  not  be  compelled  to  require  more  margins.  It  is 
a  difficult  question,  for  there  is  much  to  be  said  on  both 
sides.  Undoubtedly  if  the  average  commission  charged 
were  raised  from  ten  to  twenty  per  cent,  a  large  amount 
of  small  and  irresponsible  speculation  (bordering  close 
upon  gambling)  would  be  cut  off,  for  many  who  could 
afford  to  put  up  10  per  cent,  would  be  powerless  to  sup- 
ply 20  per  cent.  This  would  reduce  the  volume  of  specu- 
lation, and  to  that  degree  would  decrease  the  power  of 
the  stock-market  to  distribute  quickly  the  securities  of 
the  country.  But  on  the  other  hand,  there  would  be  far 
less  of  that  demoralization  which  now  results  at  times 
from  the  entrance  into  Wall  Street  speculation  of  a  crowd 
of  men  unequal,  by  reason  of  lack  of  capital  and  experi- 
ence, to  the  task  of  intelligent  trading. 

Interest  Charged. — In  calculating  the  interest  charged 
a  customer,  the  broker  usually  averages  what  he  pays  for 
his  time  and  call  loans,  and  adds  a  trifle  for  trouble  and 
office  expenses.  If  the  customer  believes  that  prices 
will  decline,  he  will  sell  short  in  order  to  reap  a  profit  by 
buying  at  lower  quotations.  Then  the  broker  borrows 
the  stock  for  him  from  some  other  broker  who  is  carrying 


THE  BROKER  AND  HIS  OFFICE  221 

it.  In  this  case  the  customer  saves  the  interest  that  at- 
taches to  a  transaction  on  the  long  side,  for  the  broker 
lending  a  stock  receives  full  market  value  for  it,  and 
pays  interest  on  the  sum  thus  received  at  a  rate  usually 
lower  than  the  bank  rate.  It  is  only  when  there  is  a 
short  supply  of  stock  that  a  premium  has  to  be  paid  to 
secure  enough  to  cover  short  sales. 

The  established  brokers'  commissions  for  round  trades, 
that  is  to  say  for  both  buying  and  then  selling,  are :  $25 
per  one  hundred  shares  of  stock ;  $6.25  per  five  thousand 
bushels  of  grain;  $10  per  one  hundred  bales  of  cotton; 
and  $20  for  two  hundred  and  fifty  bags  of  coffee.  For 
transactions  one  way  the  commissions  are,  of  course,  one- 
half  the  sum.  The  margins  usually  demanded  on  grain 
are  $250  per  five  thousand  bushels ;  on  cotton,  $100  per 
one  hundred  bales:  and  on  coffee,  $325  per  two  hundred 
and  fifty  bags. 

The  Customer's  Control. — A  customer  has  full  control 
over  his  account  at  all  times,  provided  he  keeps  his  mar- 
gins good,  and  it  is  a  custom  for  the  broker  to  notify 
him  when  the  margin  becomes  insufficient  by  reason  of 
the  movement  in  prices.  The  customer  gives  the  order 
to  buy  and  the  order  to  sell.  The  broker  merely  acts  as 
his  agent.  But  the  broker  is  bound  to  protect  himself. 
On  days  of  sudden  panic,  when  the  banks  call  in  their 
loans,  and  prices  fall  five,  ten,  and  twenty  and  sometimes 
even  thirty  points  in  a  few  hours,  it  may  be  impossible 
to  reach  the  customer,  or  the  customer  may  purposely 
keep  out  of  the  way.  Then  the  broker  may  throw  the 
customer's  stock  on  the  market  for  what  it  will  bring. 
If  he  does  not,  it  is  because  he  feels  sure  of  his  customer, 
or  has  no  time  in  the  excitement  to  clear  out  all  of  the 
accounts,  or  believes  that  the  panic  will  soon  run  its 
course  and  prices  return  to  a  normal  basis.  Many  dis- 
putes arise  over  the  disposition  of  accounts  on  a  day  of 


222  WORK  OF  WALL  STREET 

panic,  and  every  such  day  is  generally  followed  by  a 
crop  of  lawsuits  between  brokers  and  customers.*  An 
operator  who  deliberately  "lays  down  on  his  broker" — 
that  is,  lets  his  broker  carry  the  burden  and  loss  of  his 
transactions  in  time  of  panic,  and  fails  to  make  good  his 
differences — may  find  all  doors  closed  against  him  when 
he  seeks  again  to  speculate. 

Customers  may  call  for  statements  of  their  accounts  at 
any  time.  They  are  usually  rendered  once  a  month,  and 
always  when  an  account  is  closed.  Some  customers  pre- 
fer not  to  have  frequent  statements  in  order  to  avoid 
compounding  interest.  A  broker's  statement  is  a  simple 
matter  of  bookkeeping,  similar  to  a  bill  or  statement  that 
is  rendered  by  a  merchant  for  merchandise.  Brokers, 
however,  affect  different  stationery  as  best  suits  their 
ideas.  The  accompanying  folder  is  a  specimen  statement. 

This  statement  shows  that  John  Doe  has  bought  and 
sold  100  shares  of  Atchison  at  a  profit  of  $850,  less  com- 
mission, interest,  and  tax;  and  has  bought  and  is  still 
carrying  100  shares  of  Chesapeake  &  Ohio,  and  200  shares 
of  Reading  first  preferred. 

*  Justice  Day  of  the  United  States  Supreme  Court  has  rendered 
a  decision  in  which  he  held  that  the  broker  was  but  an  agent  and 
was  bound  to  follow  the  directions  of  his  principal  or  give  notice 
that  he  declined  the  agency.  The  dividends  on  the  stocks  and  the 
profits  or  losses  belonged  to  the  customer,  who  alone  took  the  risk 
of  the  venture. 

To  the  contention  that  the  usual  conditions  did  not  exist  because 
the  broker  was  not  obliged  to  return  the  very  stocks  pledged,  which 
showed  only  a  proprietary  interest,  Justice  Day  said  that  it  lost 
sight  of  the  fact  that  the  certificate  of  shares  of  stock  was  not  the 
property  itself,  being  but  an  evidence  of  property  in  the  shares. 
The  certificate,  as  the  term  applied,  merely  certified  the  ownership 
of  the  property  and  rights  in  the  corporation  represented  by  the 
number  of  shares  named.  A  certificate  of  the  same  number  of 
shares,  although  printed  on  different  paper  and  bearing  a  different 
number,  represented  precisely  the  same  kind  and  value  of  property 
as  did  another  certificate  for  a  like  number  of  shares  of  stock  in  the 
same  corporation,  and  it  was  a  misconception  of  the  nature  of  a 
certificate  to  say  that  a  return  of  a  different  certificate  or  the  right 
to  substitute  one  certificate  for  another  was  a  material  change  in 
the  property  right  held  by  the  broker  for  the  customer. 


Folio 


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This  account  has  been  and  will  be  carried  on  margin  ace 
with  authority  to  loan  or  pledge  the  s 


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•ities  carried  in  bulk  or  ptherwise  for  such  sums  as  we  see  fit. 


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THE  BROKER  AND  HIS  OFFICE  223 

Speculating  Brokers. — It  has  been  said  that  there  is  a 
class  of  brokers  who,  while  acting  as  agents  for  cus- 
tomers, also  speculate  on  their  own  account,  and  that 
others  prohibit  all  speculations  by  partners  and  clerks 
and  confine  themselves  strictly  to  a  commission  basis. 
It  would  be  of  interest  to  know  exactly  how  many  mem- 
bers of  the  Exchange  really  resist  the  temptation  to 
speculate  on  their  own  account,  but  of  course  it  is  im- 
possible to  find  out.  In  a  market  report  in  a  newspaper 
of  1835  the  writer  says :  ' '  One  of  the  evil  practices  of  the 
brokers  is  that  of  privately  dealing  in  stocks  as  princi- 
pals while  they  pass  generally  for  mere  agents  in  the 
Street.  This  practice  is  not  permitted  in  the  London 
Stock  Exchange.  Wood  &  Bogart  stick  to  the  legiti- 
mate business  of  executing  the  orders  of  their  customers, 
without  speculating  privately  on  their  own  account." 
The  same  writer  intimates  that  some  of  the  brokers  then 
did  what  would  now  be  called  "bucket-shopping"  their 
orders — that  is  to  say,  not  actually  executing  them,  but 
paying  or  receiving  the  differences  in  prices  after  a  cus- 
tomer has  closed  his  account.  This  is  gambling  pure 
and  simple,  an  illegitimate  practice  carried  on  extensively 
by  persons  outside  of  the  Exchange,  but  sternly  pro- 
hibited to  members,  and  it  is  in  many  States  prohibited 
by  law.  Operators  who  wish  to  make  certain  that  bro- 
kers are  not  bucket-shopping  their  orders  can  demand, 
as  they  have  the  right  to  do,  to  be  supplied  with  the 
name  of  the  broker  on  the  other  side  of  every  transac- 
tion. In  order  to  avoid  the  appearance  as  well  as  the 
reality  of  bucket-shopping  orders,  the  Governing  Com- 
mittee of  the  Exchange  has  made  a  rule  that  where 
brokers  have  orders  to  buy  and  orders  to  sell  the  same 
security,  they  must  offer  the  security  at  one-eighth  per 
cent,  higher  than  their  bids  before  making  transactions 
with  themselves. 


•2-24  WORK  OF  WALL  STREET 

The  stock-broker  usually  arrives  at  his  office  before 
the  opening  of  the  Exchange,  in  time  to  consult  the 
London  prices,  confer  with  his  partners  as  to  the  day's 
policy,  and  perhaps  wire  a  dispatch  of  information  and 
advice  to  branch  offices.  His  day's  routine  then  de- 
pends on  whether  he  remains  in  the  office  or  represents 
the  firm  on  the  floor  of  the  Exchange.  In  either  case 
he  is  fully  occupied  until  after  three  o  'clock,  for  be- 
sides executing  orders  for  his  customers  he  has  to  ar- 
range for  carrying  the  securities  by  loans  at  the  bank, 
and  look  after  the  many  details  of  a  complicated  busi- 
ness. After  the  close  of  the  Exchange  many  brokers 
write,  or  have  written  for  them,  what  are  called  "mar- 
ket letters,"  which  are  more  or  less  elaborate  reviews 
of  the  market  with  opinions  as  to  the  future  of  prices. 
These  are  manifolded  or  printed  and  mailed  to  cus- 
tomers. By  four  o'clock,  and  perhaps  earlier,  the 
broker  is  able  to  leave  the  Street  for  his  home  or  club. 
His  hours  are  short,  but  exceedingly  busy.  His  clerks 
follow  him  as  soon  as  their  daily  tasks  are  finished,  and 
by  six  o'clock  the  financial  district  is  deserted  by  all 
save  the  janitors  and  their  families.  Silence  reigns  in 
the  streets  recently  so  thronged  and  busy,  and  the  only 
sounds  heard  are  of  girls  jumping  their  ropes  and  boys 
playing  ball.  But  in  times  of  stress  and  trouble  the 
brokers'  offices  may  be  kept  open  until  midnight,  while 
clerks  pore  over  the  books  and  anxious  partners  ar- 
range their  affairs  for  the  next  day. 

Note. — An  article  by  Eliot  Norton  in  the  Annals  of 
the  American  Academy  of  Political  and  Social  Science, 
May,  1910,  may  be  consulted  by  those  who  wish  to  ob- 
tain a  view  of  the  legal  relations  between  a  broker  and 
his  client  in  the  purchase  or  sale  of  securities.  The  fol- 
lowing is  a  brief  extract: 

Of  the  Carrying  Out  of  the  Order. — The  relation  between  the 


THE  BROKER  AND  HIS  OFFICE  225 

customer  and  the  stock-broker  created  by  the  usual  engagement 
being  that  of  principal  and  agent,  the  principles  of  the  law  of 
agency  govern  its  carrying  out.  If  in  any  case  the  stock-broker  ' 
carries  out  the  order  according  to  the  intent  of  the  customer, 
the  customer  is  bound.  This  is  the  meaning  of  the  stock-broker 
having  authority.  If,  on  the  other  hand,  the  stock-broker  fails  to 
carry  out  the  order  according  to  the  customer's  intention,  the 
customer  is  not  bound.  In  such  a  case  he  is  not  required  to  take 
any  steps  to  assert  this.  On  the  other  hand,  if  he  chooses  to,  he 
can  ratify  what  has  been  done  contrary  to  his  intention.  Rati- 
fication rests  on  the  consent  of  the  customer  to  be  bound.  There- 
fore he  should,  as  a  matter  of  precaution,  repudiate  anything 
done  contrary  to  his  intention,  in  order  that  his  silence  may  not 
be  taken  and  used  as  evidence  of  consent. 

Another  principle  of  the  law  of  agency  is  that  the  law  requires 
of  one  who  undertakes  an  agency  that  he  should  exercise  due 
care  in  and  about  what  he  is  entrusted  to  do,  and  to  act  in  good 
faith  toward  his  principal.  If  he  fails  in  either  direction  he  will 
be  liable  in  damages. 

The  degree  of  care  which  a  stock-broker  must  show  is  to  be 
measured  by  the  standard  of  care  which  a  faithful  and  intelli- 
gent stock-broker  thoroughly  versed  in  his  business  would  show. 
It  is  not  to  be  measured  by  the  degree  of  care  which  one  not  a 
stock-broker  would  show,  or  by  that  degree  of  care  which  is  cus- 
tomary, or  which  stock-brokers  usually  give,  unless  such  degree 
of  care  is  that  which  an  intelligent,  faithful  and  competent  stock- 
broker would  show. 

The  duty  of  showing  good  faith  is  very  stringently  enforced. 
In  doing  so  judges  incline  to  lay  down  general  rules  of  conduct 
rather  than  to  decide  each  case  on  its  merits.  Thus  the  rule  is 
established  and  enforced  without  exception  that  a  stock-broker 
cannot  sell  to  or  buy  from  himself,  or  his  clerk,  or  a  firm  of 
which  he  is  a  member,  and  this  without  proof  of  fraud,  and  even 
in  case  where  the  price  obtained  for  or  given  by  the  customer  Is 
as  good  or  better  than  would  otherwise  have  been  obtained  or 
paid.  There  is  no  established  custom  which  would  justify  stock- 
brokers in  violating  this  rule  of  law.  These  are  the  main  prin- 
ciples of  the  law  of  agency  which  govern  the  carrying  out  of  an 
order. 

How,  now,  as  a  matter  of  fact,  does  a  stock-broker  carry  out 
an  order  interpreted  according  to  the  customs,  technical  mean- 


226  WORK  OF  WALL  STREET 

ings  and  technical  words  already  stated?  He  is  authorized  first 
to  contract.  This  authority  is  qualified  by  two  customs.  Before 
stating  them  it  is  necessary  that  the  "execution"  of  an  order 
consists  only  of  the  contracting  to  buy  or  to  sell  the  securities 
ordered  upon  the  terms  of  the  order,  and  an  order  is  said  to  be 
"executed"  when  this  is  done.  In  other  words,  the  "execution" 
of  an  order  is  the  carrying  out  of  the  authority  to  contract.  The 
two  customs  are: 

1.  An  order  in  the  regular  form  to  buy  or  to  sell  securities 
can  only  be  "executed,"  if  at  all,  on  the  day  it  is  given,  unless  it 
is  expressly  stated  in  the  order  that  it  is  "good"  for  a  longer 
period  of  time  or  for  some  particular  period  of  time. 

2.  There  is  implied  as  a  term  or  condition  of  an  order  in  the 
regular  form  that  the  stock-broker  shall  try  to  "execute"  the  or- 
der as  early  in  the  time  for  which  it  is  "good"  as  it  is  possible 
for  him  to  do  in  accordance  with  the  rules  and  customs  of  the 
stock  exchange  to  which  he  belongs. 

These  two  customs  are  so  well  established  that  a  customer 
would  probably  be  held  bound  by  them,  even  though  nothing  was 
said  about  them  at  the  time  the  order  was  given ;  and  hence,  if 
he  does  not  wish  them  to  apply  to  an  order,  he  must  say  so 
clearly  to  the  stock-broker.  Assuming  they  do  apply,  the  stock- 
broker's first  step  after  taking  an  order  is  to  try  to  execute  it  at 
the  earliest  possible  moment  in  the  time  it  is  good  for.  If  he 
neglects  this  duty  he  will  be  liable  in  damages. 

REFERENCES 

"Treatise  on  the  Law  of  Stock-Brokers  and  Stock  Exchanges," 
John  R.  Dos  Passos,  1905. 

"On  Buying  and  Selling  Securities  through  a  Stock-broker,"  Eliot 
Norton,  1896. 

"A  Simple  Purchase  and  Sale  through  a  Stock-broker,"  Eliot  Nor- 
ton, "Harvard  Review"  VIII,  No.  8. 

"Stock-brokers'  Accounts,"  Callaway. 

"How  to  Deal  with  Your  Broker,"  Warren. 


CHAPTER  XVI 
THE  LANGUAGE  OF  WALL  STREET 

The  language  of  Wall  Street  is  especially  full  and 
rich.  It  has  in  addition  to  many  technical  words  an 
argot  of  slang,  often  very  expressive  of  the  meaning  to 
be  conveyed,  but  sometimes  puzzling  to  the  uninitiated. 
So  many  are  its  technical  and  slang  terms  that  glos- 
saries have  been  published  giving  definitions.  One  of 
these  contains  a  list  of  four  hundred  words  and  phrases 
in  common  use  in  the  Street,  and  even  this  is  not  com- 
plete. The  significance  of  the  more  important  of  the 
terms  is  indicated  in  appropriate  places  in  the  different 
chapters  of  this  book  as  being  more  convenient  for  the 
reader,  but  it  is  necessary  to  bring  some  of  them  to- 
gether so  that  their  related  meaning  may  be  better 
understood  and  appreciated. 

Many  of  the  terms  employed  in  Wall  Street  are  like- 
wise used  in  other  branches  of  business,  as  for  instance: 
money,  the  medium  of  exchange  and  the  measure  of 
value ;  credit,  by  which  something  of  value  is  trans- 
ferred to  another  on  a  promise  of  future  payment; 
exchanges,  which  are  the  volume  of  the  things  of 
value  or  the  representative  of  the  things  of  value 
exchanged;  the  market,  the  convenient  place  where 
these  exchanges  can  be  made;  the  Exchange,  an  asso- 
ciation for  the  purpose  of  providing  a  regulated  market, 
and  it  is  also  the  building  in  which  the  market  is  lo- 
cated. Exchange  is  also  a  term  used  to  denote  the  sys- 
tem by  which  commodities,  or  other  things  of  value,  are 
exchanged  between  distant  localities  by  the  use  of  bills, 
checks  and  drafts;  foreign  exchange,  denoting  that  sys- 

227 


228  WORK  OF  WALL  STREET 

tern  as  applied  to  international  commerce  and  domestic 
exchange  as  applied  to  inland  or  domestic  commerce. 
In  Wall  Street,  however,  these  and  other  like  terms  are 
used  with  a  precision  which  is  usually  lacking  in  other 
than  great  money  centers. 

Persons. — Wall  Street  employs  many  terms  to  de- 
scribe the  different  persons  engaged  in  the  stock  and 
money  markets,  in  speculation  and  investment.  Thus 
there  are  bankers,  brokers,  principals,  investors,  specu- 
lators, operators,  professionals,  manipulators,  lambs,  the 
public,  insiders,  outsiders,  bulls,  bears,  plungers, 
scalpers,  room  traders,  specialists,  cliques,  combines, 
pools,  and  syndicates. 

Market. — Other  terms  apply  to  the  character  of  the 
stock-market.  This  market,  we  are  told,  is  either  strong 
or  weak,  firm,  steady  or  soft,  rigged  or  stagnant,  active 
or  inactive,  in  a  flurry  or  panic  or  boom.  Prices  rise 
and  fall,  advance  and  decline,  rally,  recover,  react,  drop, 
and  slump.  They  advance  and  decline  by  points.  A 
stock  is  cornered,  pegged,  manipulated,  pyramided,  or 
ballooned. 

Position. — Other  terms  describe  the  position  of  differ- 
ent classes  of  persons  in  the  market.  Bulls  and  bears 
are  either  long  or  short.  They  have  straddled  or 
hedged.  They  have  loaded  or  covered  or  realized,  as  the 
case  may  be.  They  have  taken  a  flier  or  have  been 
frozen  or  wiped  out.  Shorts  may  be  squeezed.  The 
lambs  may  be  sheared.  The  bears  may  make  a  drive 
or  they  may  be  gunning  a  stock.  Insiders  may  be  plan- 
ning a  deal.  The  broker  may  be  kite-flying.  The 
speculator  may  have  bought  a  put  or  call  or  spread. 
The  banker  may  make  a  specialty  of  arbitrage  business. 
The  customer  may  give  a  stop  order.  He  may  have  cop- 
pered a  tip.  The  pool  may  be  selling  out.  The  syn- 
dicate may  be  washing  sales  by  matched  orders 


THE  LANGUAGE  OF  WALL  STREET  229 

through  curb  brokers  in  order  to  market  watered  stock. 

Routine. — Other  terms  apply  to  the  routine  of  the 
broker  and  the  various  tools  he  employs.  He  executes 
an  order.  He  demands  more  margin  from  his  customer. 
He  makes  out  a  comparison  or  exchange  slip  and  makes 
delivery.  He  clears  his  stock.  He  hypothecates  his 
security.  He  keeps  his  balance  good  at  the  bank.  He 
gets  his  checks  certified.  He  carries  his  securities  on 
loans.  He  renders  a  statement.  He  consults  the  tape 
and  the  news  slips  and  the  bank  statement.  He  will  not 
bucket-shop  his  business  or  accept  discretionary  orders. 
He  will  not  split  his  commissions.  If  he  suspends,  he  is 
sold  out  under  the  rule. 

Something  must  be  said  in  further  explanation  of  these 
terms.  The  terms,  speculator  and  operator,  are  prac- 
tically synonymous,  except  that  operator  generally 
applies  to  a  professional.  A  professional  may  or  may 
not  be  a  manipulator,  but  a  manipulator  is  always  a 
professional.  The  customer  is  the  broker's  principal. 
The  broker  is  his  customer's  agent.  Lambs  are  always 
outsiders,  but  not  all  outsiders  are  lambs.  Public  is  a 
collective  term  for  outsiders  who  do  not  speculate  as  a 
regular  business,  but  enter  the  market  in  large  numbers 
in  bull  movements,  and  remain  out  of  it  in  times  of 
stagnation  or  weakness.  Bulls  are  always  long  of  stock. 
When  they  sell  they  realize  or  liquidate.  Bears  are 
always  short  in  the  market,  and  they  realize  their  profits 
by  covering.  Scalpers  are  room  traders  who  buy  and 
sell  stocks  on  the  narrowest  profit,  the  difference  in  their 
favor  being  not  more  than  -J  or  £  of  1  per  cent.  A  tip 
is  coppered  by  acting  contrary  to  the  information  it 
conveys.  A  pool  is  a  combination  of  operators  who 
make  a  common  contribution  for  the  purchase  of  a  stock 
or  stocks  and  divide  the  profits,  if  any.  A  blind  pool  is 
one  in  which  all  the  members  are  kept  in  ignorance  of 


230  WORK  OF  WALL  STREET 

its  operations,  except  the  one  who  manages  it.  A  deal 
is  the  operation  resulting  from  a  secret  combination  or 
agreement  among  Wall  Street  men  to  effect  a  certain 
purpose,  generally  of  a  manipulated  character  in  the 
market.  A  corner  is  the  consequence  of  bears  selling 
more  stock  than  is  issued  or  than  can  be  purchased  in 
the  market,  so  that  they  can  not  make  delivery  and  are 
obliged  to  settle  at  high  figures  involving  heavy  losses. 

A  market  is  steady  when  it  holds  its  own.  It  is  firm 
when  it  advances,  and  is  strong  when  the  gains  are 
large.  It  is  soft  when  it  inclines  to  fall,  and  is  weak 
when  it  declines.  It  is  inactive  when  the  sales  are  de- 
creasing, and  stagnant  when  the  volume  of  trading  is 
very  small.  Flurries  and  slumps  are  severe  breaks  in 
prices,  that  do  not  reach  the  dimensions  of  a  panic.  A 
market  is  rigged  when  it  is  manipulated.  It  reacts  from 
an  advance.  It  rallies  or  recovers  from  a  decline.  A 
point  is  1  per  cent.  A  stock  is  pegged  when  its  price 
is  held  at  a  certain  figure  so  that  it  can  not  decline. 

Kite-flying  is  the  act  of  unduly  extending  one's  credit, 
and  the  term  generally  conveys  the  idea  of  a  criminal 
transaction  like  the  issue  of  fictitious  or  fraudulent 
paper. 

Pyramiding  is  only  possible  in  a  bull  market.  A  man 
on  a  slender  margin  buys  a  few  shares  of  stock,  and  as 
the  price  advances  uses  his  profit  to  buy  more  and  still 
more,  until  on  the  original  investment  of  a  few  dollars 
he  has  a  paper  profit,  it  may  be,  of  thousands  of  dollars. 
Thus,  stories  are  told  of  men  who  on  an  original  pur- 
chase of  fifty  shares  realized  profits  of  $200,000. 
Usually,  however,  these  inverted  pyramids  are  overturned 
by  some  sudden  reaction  in  the  market  before  the  spec- 
ulator is  content  to  turn  his  paper  profits  into  cash. 

A  ballooned  stock  is  one  whose  market  price  has  been 
unduly  inflated  by  manipulation. 


THE  LANGUAGE  OF  WALL  STREET  231 

An  operator  has  straddled  the  market  when  he  has  got 
on  both  sides  of  it  at  once,  the  same  as  a  gambler  hedges 
his  bet.  He  is  taking  a  flier  when  he  buys  or  sells  for  a 
quick  turn.  He  guns  a  stock  or  makes  a  drive  when  he 
tries  to  break  its  price  so  as  to  compel  the  longs  to 
unload.  Shearing  the  lambs  is  the  Wall  Street  method 
of  relieving  novices  of  the  money  they  have  invested  in 
speculation.  The  margins  being  exhausted,  the  lambs 
return  to  the  slow  but  sure  profits  of  their  regular  avo- 
cations. Wash  sales  are  fictitious  sales  for  the  purpose 
of  making  fictitious  prices. 

Puts,  calls,  and  spreads  are  what  are  called  privileges ; 
they  are  essentially  bets  on  prices.  When  one  buys  a 
put  he  is  practically  betting  that  the  price  of  a  certain 
stock  will  decline.  Some  operators  much  prefer  to  buy 
puts  than  to  sell  short.  When  one  buys  a  call  he  bets 
the  price  will  advance.  While  the  put  or  call  specifies 
the  number  of  shares  to  be  delivered  or  called,  there  is 
no  actual  transfer  of  stock  on  them.  A  put  is  a  privilege 
to  deliver  within  a  certain  specified  period  a  specified 
number  of  shares  at  a  specified  price.  If  the  market 
declines,  the  holder  of  the  put  has  a  chance  to  buy.  the 
stock  and  deliver  at  the  higher  price  named  in  the  put, 
but  as  a  matter  of  fact  the  transaction  is  closed  by  the 
payment  of  the  difference  in  the  prices.  A  call  is  the 
reverse  of  this  operation.  In  this  case  the  holder  of  the 
privilege  can  call  on  the  person  issuing  it  for  a  specified 
number  of  shares.  If  the  market  price  has  advanced 
above  the  price  named  in  the  call  there  is  a  profit.  A 
spread  is  a  combination  of  put  and  call.  The  holder  has 
a  privilege  to  deliver  at  one  price  or  to  call  at  another. 
For  these  privileges  the  buyer  pays  a  sum  varying  with 
the  time,  amount,  and  price  named  in  the  paper.  If  the 
market  fails  to  move  as  he  expects,  the  buyer  of  the 
privilege  is  out  of  pocket  the  amount  he  has  paid  for  it. 
17 


232  WORK  OF  WALL  STREET 

Classes  of  Stocks. — Wall  Street  has  a  variety  of  words 
that  describe  certain  stocks  or  classes  of  stocks.  Thus 
there  are .  industrial,  franchise,  traction,  granger,  and 
coal  stocks.  The  "Big  Four"  is  the  stock  of  the  Cleve- 
land, Cincinnati,  Chicago  &  St.  Louis.  The  "Nickel 
Plate"  is  the  New  York,  Chicago  &  St.  Louis  Railroad. 
The  "Pan-Handle"  is  the  Pittsburg,  Cincinnati,  Chicago 
St.  Louis  Railroad.  The  "Monon"  is  the  Chicago,  In- 
dianapolis &  Louisville  Railroad.  "When  the  Wall  Street 
man  speaks  of  "Sugar,"  he  generally  means  not  the  raw 
nor  the  refined  product,  but  the  stock  of  the  American 
Sugar  Refineries  Company.  When  he  speaks  of  St.  Paul, 
he  refers  not  to  the  great  Apostle  or  the  city  of  that 
name,  but  to  the  stock- of  the  Chicago,  Milwaukee  &  St. 
Paul  Railroad. 

When  a  railroad  stops  paying  dividends,  it  "passes  its 
dividend."  When  the  books  of  a  company  have  closed 
for  the  payment  of  a  dividend,  the  stock  sells  ex- 
dividend — that  is  to  say,  the  purchaser  does  not  receive 
the  dividend.  A  stock  sells  at  par  when  its  quotation  is 
100.  It  is  above  or  below  par  by  as  much  as  it  sells 
above  or  below  100.  Carrying  charges  are  the  cost  of 
carrying  stocks  bought  on  margin — that  is,  the  interest 
paid  to  the  broker  on  the  amount  he  advances.  Rights 
are  frequently  dealt  in  on  the  stock-market.  When  a 
company  issues  new  stock  it  generally  gives  its  stock- 
holders the  right  to  subscribe  at  a  figure  considerably 
lower  than  the  market  price.  Rights  are  therefore  val- 
uable and  are  bought  and  sold  like  stock.  The  terms 
flat  and  premium  are  used  in  the  operation  of  borrowing 
stock  as  well  as  in  other  ways.  If  there  are  many  bor- 
rowers, the  competition  will  lead  them  to  give  full  value 
for  the  stock  without  interest;  that  is  "flat."  Or  if 
there  is  a  great  scarcity  of  stock  the  borrowing  demand 
establishes  a  premium  for  it.  If  more  than  par  is  bid 


THE  LANGUAGE  OF  WALL  STREET  233 

for  a  new  issue  of  bonds,  it  is  said  that  the  premium  is 
so  much.  If  the  country  has  suspended  gold  payments, 
gold  then  commands  a  premium  over  currency. 

Communities  of  Interests. — A  term  that  has  come  into 
common  use  in  Wall  Street  is  "communities  of  inter- 
ests." This  term  is  the  legitimate  offspring  of  the  "gen- 
tlemen's agreement,"  which  died  and  was  buried  long 
ago.  The  gentlemen's  agreement  was  understood  to  be 
an  agreement  between  railroad  magnates  not  to  cut 
rates  or  resort  to  other  practices  resulting  in  wasteful 
competition.  Gentlemen's  agreements,  however,  were 
generally  broken.  Communities  of  interests  are  more 
substantial  and  likely  to  be  more  enduring.  They  con- 
sist in  bringing  about  such  relations  between  great 
moneyed  powers,  that  the  interests  of  one  are  interlaced 
with  the  interests  of  the  others,  so  that  they  shall  be 
directed  under  a  common  policy  and  for  a  common  end. 
There  is  still  a  degree  of  competition,  but  extreme  compe- 
tition ceases. 

There  are  a  number  of  terms  used  in  the  London 
market  that  are  never  heard  of  in  Wall  Street,  as,  for 
instance,  contango  and  backwardation,  which  refer  to 
the  charges  for  carrying  stocks  to  settlement  day.  Job- 
bers is  also  a  London  term.  There  are  no  jobbers  in 
Wall  Street,  but  stock-jobbing  is  a  term  in  frequent  use 
to  describe  the  operation  of  buying  and  selling  stocks  for 
speculation  accompanied  by  intrigue  or  manipulation. 

Origin  of  Terms. — Many  of  the  terms  of  the  stock- 
market  are  as  old  as  stock  speculation  itself.  The  two 
main  divisions  of  the  market  have  been  known  as  bulls 
and  bears  for  more  than  two  centuries.  There  have 
been  many  conjectures  as  to  the  origin  of  these  terms. 
As  a  bull  lifts  and  throws  an  object  up  with  its  horns, 
that  may  be  the  reason  of  his  selection  as  a  type  of  spec- 
ulators who  buy  for  an  uplift  of  prices.  As  a  bear  seeks 


234  WORK  OF  WALL  STREET 

to  depress  prices,  his  name  may  be  derived  from  the 
verb  to  bear,  meaning  to  press  heavily  upon.  By  some 
it  is  held  to  be  derived  from  the  adjective  bare,  because 
the  bear  having  sold  short  is  bare  of  the  stock.  But  a  cen- 
tury ago  the  "Wall  Street  bear  was  described  as  being  like 
the  hunter  who  sells  a  bear's  skin  before  he  has  suc- 
ceeded in  shooting  the  bear,  and  that  is  about  as  com- 
plete a  description  as  could  be  given. 

The  argot  of  the  stock-market  has  now  become  a  recog- 
nized part  of  the  language  of  commerce,  and  many  of 
the  terms  are  included  in  the  later  dictionaries. 

REFERENCES 
"Financial  Directory."  Howard  Irving  Smith,  1908. 


CHAPTER  XVII 

READING  THE  MARKET 

More  and  more  the  requirements  of  business  success 
call  not  only  for  special  training  in  the  technique  of  a 
trade  or  art,  but  also  for  an  understanding  of  the  princi- 
ples which  underlie  it.  The  merchant,  the  banker  and 
the  Wall  Street  man  of  to-day,  need  to  know  something 
of  politcal  economy.  A  knowledge  of  theory  is  neces- 
sary as  well  as  an  expertness  in  practice.  The  notable 
success  of  the  Germans*  in  industry,  banking  and  the 
export  trade  is  due  very  largely  to  the  training  they 
obtain  in  the  admirable  commercial  schools  of  that 
country,  and  it  is  recognition  of  that  fact  which  has 
caused  the  Chambers  of  Commerce  of  London,  New  York 
and  Boston  to  take  up  the  question  of  business  education 
in  a  practical  way,  for  the  purpose  of  increasing  the 

*  In  Germany,  business  means  something  more  than  buying  hats 
cheap  and  selling  them  dearly,  something  more  than  mere  money- 
making.  The  head  of  a  great  industrial  undertaking  is  a  scientist 
in  the  true  sense  of  the  word.  He  is  as  far  removed  from  the 
thought  of  making  money,  simply  for  the  sake  of  money,  as  a  civil 
engineer  is  removed  from  the  thought  of  making  profit  out  of  a 
bridge  which  he  is  commissioned  to  design.  It  is  the  science  of  the 
thing  that  counts  in  Germany,  the  way  in  which  a  particular  com- 
mercial problem  is  to  be  solved.  Conduct  your  business,  however 
small,  scientifically,  says  the  German,  and  the  money  will  take  care 
of  itself. 

It  would  be  absurd  to  attribute  to  the  remarkable  commercial 
high  schools  and  academies  of  Germany,  all  the  credit  for  the  suc- 
cess of  the  German  business  man ;  but  the  part  that  they  play  in 
commercial  life  is  anything  but  small.  They  teach  the  technique  of 
commerce,  the  economic  relations  of  one  industry  to  another,  the 
significance  of  modern  banks  and  railroads,  and  above  all  they  teach 
the  attitude  which  the  business  man  must  assume  toward  the  State, 
the  world,  and  his  immediate  competitors  in  business. 

WALDEMAB  KAEMPFFERT  in  "Scientific  American." 
235 


236  WORK  OF  WALL  STREET 

number  and  of  raising  the  standards  of  schools  of  com- 
mercial education.  A  notable  advance  along  this  line 
has  indeed  been  made  in  this  country  during  the  last 
twenty  years.  "We  have  a  number  of  high  class  com- 
mercial schools,  and  they  are  excellent  and  progressive 
institutions.  But  the  object  is  not  only  to  establish  more 
professional  schools  devoted  especially  to  finance  and 
commerce,  and  to  bring  them  into  closer  touch  with 
business  men,  but  to  adapt  the  whole  educational  system 
of  the  country  more  and  more  to  the  requirements  of 
modern  commerce  and  industry. 

So  wide  is  the  scope  of  Wall  Street  that  any  success 
there,  which  is  not  to  be  solely  the  result  of  mere 
chance,  calls  for  a  knowledge  of  economics,  of  geogra- 
phy, of  politics  and  government,  of  accounting  and  to 
some  extent  even  of  science  and  philosophy.  Therefore 
the  educated  man  has  the  advantage  there  as  well  as 
everywhere  else.* 

Every  speculator,  every  large  investor,  every  man  en- 
gaged in  big  business  even  though  he  never  buys  or  sells 
stocks,  should  know  how  to  "read  the  market,"  which 
means 

a. — Reading  "the  signs  of  the  times"  in  all  parts  of 
the  world;  and 

b. — Reading  the  special  conditions  of  the  local  sit- 
uation. 

*  In  all  its  aspects,  business  is  becoming  more  and  more  a  special- 
ized profession,  and  our  colleges  and  schools  should  so  change  their 
methods  and  courses  that,  breaking  away  from  wornout  traditions, 
they  may  fit  the  individual  who  seeks  to  be  a  power  in  the  com- 
mercial world  for  its  real  problems.  This  does  not  call  for  any 
lowering  of  standards,  but  for  such  a  change  in  methods  as  shall 
make  education  the  effective  handmaiden  of  modern  commerce.  I 
believe  that  the  future  prosperity  and  progress  of  this  country  will 
depend  more  and  more  upon  the  right  kind  of  training  being  im- 
parted to  the  great  body  of  coming  business  men,  who  go  to  make 
up  our  business  communities. 

JAMES  G.  CANNON. 


READING  THE  MARKET  237 

Reading  the  "Tape." — Reading  the  market  means 
something  more  than  reading  the  stock  tape;  though 
there  are  Wall  Street  men  who  become  so  expert  in  read- 
ing the  tape  that  the  varying  and  rapid  changes  in  prices 
there  recorded  mean  much  more  to  them  than  to  others, 
and  they  become  so  sensitive  to  the  tape  as  to  be  able 
intuitively  to  feel  what  is  going  to  happen  before  it  takes 
place.  But  these  men,  so  sensitive  to  market  changes  of 
an  hour  or  a  day,  may  be  entirely  lacking  in  ability  to 
grasp  the  complicated  and  world-wide  conditions  which 
combine  to  make  a  business  situation  of  a  year  or  five 
years.  The  man  who  tests  everything  by  the  tape  is 
one  who  examines  phenomena  through  a  microscope ; 
while  one  who  investigates  international  economic  and 
political  conditions  is  like  one  who  looks  through  a 
telescope. 

The  business  man,  and  especially  one  whose  interests 
are  affected  by  the  security  markets,  must  of  necessity 
have  a  wide  vision,  for  the  cable,  the  telegraph,  the  rail- 
road and  the  ocean  steamer  have  brought  the  uttermost 
parts  of  the  world  so  close  together,  that  the  state  of  the 
market  in  New  York  may  depend  upon  an  event  in 
Africa,  a  famine  in  India,  a  revolution  in  China,  a  short 
crop  in  Argentina,  a  speech  in  the  English  Parliament, 
a  murder  trial  in  Los  Angeles,  an  editorial  in  a  weekly 
paper  in  Philadelphia,  or  an  election  in  Canada. 

Any  one  engaged  in  business,  therefore,  whether  in 
Wall  Street  or  out  of  it,  but  especially  if  he  is  engaged 
in  the  stock-market,  must  understand  how  to  read  the 
signs  of  the  times,  and  after  bringing  together  the  vari- 
ous facts  obtained  from  every  part  of  the  earth,  be  able 
to  form  a  fairly  accurate  judgment  as  to  the  course  of 
the  markets.  In  so  far  as  he  is  able  to  do  this,  he  is  able 
to  reduce  the  risks  of  business;  in  so  far  as  he  fails,  he- 
is  dependent  upon  chance  like  a  mere  gambler. 


238  WORK  OF  WALL  STREET 

The  main  difference  between  the  big  man  and  the  small 
man  in  affairs  to-day,  is  not  alone  in  the  amount  of  cap- 
ital and  credit  which  they  control,  but  in  their  ability  to 
read  the  market.  Even  the  big  man,  with  all  his  range 
of  information,  can  sometimes  see  but  a  little  way  into 
the  future,  but  he  can  see  further  than  the  man  small  in 
information  and  small  in  ability  to  understand  the  in- 
formation which  he  may  possess. 

Agencies  of  Publicity. — Fortunately  for  the  common 
man,  and  indeed  for  the  whole  world  of  commerce,  mod- 
ern agencies  of  publicity  now  make  it  possible  for  any 
one  to  obtain  the  main  facts  upon  which  to  base  a  read- 
ing of  the  business  situation.  Publicity  thus  has  a  two- 
fold advantage,  namely,  that  it  renders  manipulation 
more  difficult,  and  at  the  same  time  gives  to  the  ordinary 
individual  at  least  some  of  the  advantages  formerly 
possessed  only  by  those  of  extraordinary  means.  Pub- 
licity is  the  first  safeguard  of  Democracy,  and  this  ap- 
plies alike  in  business  and  in  government. 

The  modern  business  man  must  know  what  is  going  on 
in  the  world,  and  this  is  true  not  alone  as  to  events  in 
commerce,  though  that  is  of  prime  importance  to  him, 
but  also  to  events  in  politics,  events  in  science  and  even 
events  in  literature,  because  the  publication  of  a  new 
book  may  possibly  affect  profoundly  the  progress  of 
civilization.  He  can  hardly  be  taught  how  to  combine 
the  information  he  obtains  so  as  to  enable  his  mind  to 
form  accurate  judgments.  That  he  must  learn  for  him- 
self through  experience.  The  principal  sources  from 
which  he  may  obtain  information  upon  which  to  form 
judgments  may,  however,  be  stated.  These  sources 
include : 

The  Newspaper. — The  modern  daily  newspaper,  which 
has  developed  news-gathering  into  a  high  degree  of  ef- 


READING  THE  MARKET  239 

ficiency,  may  be  depended  upon  to  give  the  great  events 
of  the  day  in  all  departments — the  mountain  peaks  of 
information. 

Trade  Papers. — Trade  journalism  has  been  wonder- 
fully improved  in  recent  years,  and  now  in  ,each  im- 
portant branch  of  industry,  trade,  and  science,  there  are 
periodicals  representing  it  with  a  considerable  degree 
of  authority — and  these  supply  the  business  man  with 
much  detailed  information  which  he  cannot  ordinarily 
find  in  the  great  newspapers. 

Government  Publications. — Government  publications 
of  our  own  and  other  countries  are  important  sources  of 
information.  No  business  man,  for  instance,  should  fail 
to  have  "The  Statistical  Abstract  of  the  United  States" 
where  he  may  readily  consult  it.  The  export  merchant 
should  be  supplied  with  the  ' '  Consular  Reports ' ' ;  and  all 
whose  interests  lie  in  the  agricultural  development  of  the 
country  will  study  closely  the  crop  reports. 

Manuals. — There  are,  in  addition,  certain  publications, 
periodical,  quarterly  or  annual,  which  are  standard  man- 
uals of  statistical  or  other  information  that  are  indis- 
pensable for  ready  reference.  Among  these  may  be 
mentioned  the  Financial  and  Commercial  Chronicle, 
Poor's,  and  Moody 's  Manuals,  the  Stock  Exchange'  Official 
Intelligence,  and  other  publications  relating  to  corporate 
securities  of  all  classes. 

Financial  Authorities. — There  are  also  daily  and 
weekly  financial  publications,  such  as  the  "news  slips" 
described  in  another  chapter,  The  Journal  of  Commerce, 
The  Wall  Street  Journal,  The  London  Economist,  The  Lon- 
don Statist,  and  others  which  are  of  high  value  to  both 
investors  and  speculators. 

From  all  these  and  other  public,  as  well  as  private, 
sources,  the  intelligent  business  man  will  strive  to  keep 


240  WORK  OF  WALL  STREET 

well  informed  in  regard  to  the  following  points,  all  of 
which  have  a  bearing  upon  the  state  of  trade,  the  course 
of  prices,  the  activity  of  the  markets: 
Politics. — ( 1 )     International : 

(a)  Relations    of    our    government    with    any    other 
foreign   government,   especially  such   as   might   produce 
friction  leading  to  war  or  to  the  raising  of  obstacles  for 
the  interchange  of  business; 

(b)  Conflicts   of  arms   or  diplomacy,   or  commerce, 
between  other  nations  such  as  would  have  an  influence 
on  the  rates  of  money  or  the  prices  of  securities. 

(2)     Domestic: 

(a)  The    conflicts   of   national   politics   such    as   are 
liable  to  result  in  change  of  governmental  policy,  par- 
ticularly as  regards  the  tariff,  the.  railroads,  and  the  in- 
dustrial organizations; 

(b)  The  movements  in  State  affairs  liable  to  affect  the 
laws  and  their  enforcement,  particularly  as  regards  the 
franchise  corporations,  the  banks  and  the  insurance  in- 
stitutions, and  as  regards  the  laws  governing  the  organ- 
ization of  companies. 

Products  of  the  Soil. — (1)  Crops:  When  it  is  stated 
that  the  annual  product  of  the  farms  of  the  United  States 
amounts  to  over  $8,000,000,000  it  becomes  clear  how 
basic  to  national  prosperity  is  the  yield  of  the  principal 
crops;  and  cotton  and  wheat  have  a  particular  im- 
portance because  they  are  great  export  products. 

The  connection  between  the  stock-market  and  the  pro- 
ductive agencies  of  the  nation  is  necessarily  very 
intimate.  As  the  Street  facilitates  the  movement  of  com- 
merce, finances  the  railroads  and  great  industrial  enter- 
prises, and  furnishes  the  means  for  moving  the  crops 
to  market,  an  upheaval  in  the  Stock  Exchange,  if  of 
sufficient  magnitude,  may  be  felt  in  every  shop  and  mill 
and  farm  from  the  Atlantic  to  the  Pacific.  On  the  other 


READING  THE  MARKET  241 

hand,  depression  in  trade  produces  stagnation  in  specu- 
lation. 

The  three  main  sources  of  a  nation's  wealth  are  its 
mines,  its  agriculture,  and  its  manufactures.  The  se- 
curities dealt  in  on  the  Exchange  represent  the  mines, 
the  crops,  and  the  products  of  the  factories.  If  the 
mines  are  prolific,  the  crops  bountiful,  and  the  forges 
ablaze  -by  night  and  by  day,  the  fact  is  reflected  in  the 
Stock  Exchange  transactions.  Prices  advance,  sales  in- 
cr'ease,  speculation  is  active.  Wall  Street  therefore 
keeps  its  fingers  constantly  on  the  pulse  of  trade.  The 
three  principal  crops  are  cotton,  wheat,  and  corn.  The 
time  was  when  "cotton  was  king,"  and  a  failure  in  the 
cotton  crop  spelled  national  disaster.  Even  now  a  short 
cotton  crop  would  be  not  only  a  severe  blow  to  the 
South,  but  also  inflict  a  loss  that  would  be  felt  more  or 
less  all  over  the  country.  A  failure  in  the  corn  or  wheat 
crop  has  more  than  once  been  the  forerunner  of  a  com- 
mercial crisis. 

Crop  reports  are  issued  regularly  by  the  Government 
Department  of  Agriculture,  and  these  give  official  in- 
formation regarding  the  acreage  and  condition  of  the 
growing  crops.  For  instance,  in  April  an  estimate  is 
given  of  the  average  condition  of  winter  wheat;  in  June 
estimates  are  given  of  spring  and  winter  wheat;  in  July 
the  acreage  and  condition  of  corn  are  disclosed ;  and  so  on 
through  the  year,  each  month's  report  giving  a  showing 
of  all  the  principal  crops  of  the  country.  Wall  Street  is 
not  content  to  rely  entirely  on  these  official  reports. 
Many  unofficial  reports  are  issued,  some  of  them  elab- 
orate and  reliable,  being  summaries  of  statements  sent  in 
from  hundreds  of  correspondents  in  all  sections  of  the 
crop  area.  The  Government  also  issues  monthly  reports 
of  commerce  showing  the  value  of  imports  and  exports. 

(2)     Mining:     Regular  reports  are  obtainable  as  to  the 


242  WORK  OF  WALL  STREET 

production  of  coal,  iron,  copper,  silver  and  gold,  and  all 
of  these  have  important  bearing  upon  business.  To  gold 
production  has  been  given  a  special  significance  because 
of  the  belief  of  many  economists  (but  not  all)  shared  in 
by  some  bankers  (but  not  a  majority)  that  the  volume  of 
gold  mined  has  a  determining  influence  upon  prices. 
The  quantitative  theory  of  money  is  the  subject  of  much 
controversy,  but  whatever  its  real  relation  to  prices,  the 
output  of  the  gold  mines  and  particularly  those  of  the 
Transvaal,  from  which  monthly  records  are  obtained,  is 
watched  closely  by  business  men.  Copper  enters  into  so 
many  modern  uses,  notably  electrical,  and  there  are  so 
many  important  copper  stocks,  that  the  records  of  pro- 
duction and  consumption  are  now  of  high  importance  in 
sizing  up  the  business  situation.  The  consumption  of  coal 
is  of  special  significance  to  the  coal  stocks  and  of  general 
bearing  upon  industrial  activity. 

An  enormous  output  of  gold  such  as  followed  its  dis- 
covery in  California,  and  more  recently  in  the  Klondike 
and  the  Transvaal,  has  been  responsible  for  great 
"booms"  in  business  and  activity  in  speculation.  Less 
than  twenty  years  •  ago  depression  in  the  coal  trade 
caused  a  severe  shrinkage  in  the  prices  of  the  coal  stocks, 
and  the  whole  stock-market  suffered  thereby.  In  1902 
the  market  suffered  from  the  strike  in  the  anthracite  coal 
region. 

Industries. — The  United  States  is  in  a  state  of  rapid 
transition  from  a  country  that  was  chiefly  agricultural 
into  a  country  which  is  now  as  much  industrial  as  it  is 
agricultural.  Its  great  industries  have  passed  into  the 
hands  of  big  companies  whose  securities  are  represented 
in  the  Stock  Exchanges.  Thus  the  industrial  production 
is  important  both  in  a  commercial  and  a  financial  way. 
The  iron  and  steel  trade  has  long  been  considered  a 
barometer  of  business  activity,  and  the  statistical  reports 


READING  THE  MARKET  243 

of  production,  and  of  "unfilled  orders,"  and  the  reviews 
of  trade  conditions  by  the  Iron  Age  and  other  author- 
ities have  a  marked  influence  on  the  markets. 

Commerce. — (1)  Foreign:  The  volume  of  our  foreign 
trade  is  by  no  means  as  large  as  our  domestic  trade, 
but  it  is  so  great  as  to  be  an  ever  present  influence,  par- 
ticularly as  we  need  a  large  balance  of  merchandise 
commerce  in  our  favor  because  of  the  immense  sums 
which  we  are  required  to  pay  abroad  as  interest  on 
foreign  investments  in  the  United  States,  as  payment  for 
freights  carried  in  foreign  ships,  as  expenses  of  Ameri- 
can tourists  and  in  other  ways.  The  weekly  statements 
of  foreign  commerce  from  the  Port  of  New  York  (about 
48  per  cent,  of  the  whole)  and  the  monthly  statements  of 
exports  and  imports  issued  from  Washington  are  there- 
fore carefully  studied  and  analyzed. 

(2)  Domestic:  The  statistics  of  domestic  commerce 
are  not  so  comprehensive  as  those  of  foreign  trade,  but 
nevertheless  there  are  a  number  of  methods  by  which  its 
volume  may  be  measured,  for  instance: 

(a.)  By  bank  clearings.  Inasmuch  as  85  per  cent, 
of  all  the  business  of  the  country  is  carried  on  by  checks, 
and  as  the  great  bulk  of  the  checks  pass  through  the 
clearing  houses,  it  follows  that  the  transactions  of  the  111 
clearing  houses  of  the  country  furnish  an  admirable  test 
of  the  volume  of  trade,  and  it  is  possible  by  an  intelli- 
gent use  of  the  weekly  statements  to  learn  what  section 
of  the  country  is  doing  the  best  or  suffering  the  most  as 
the  case  may  be. 

(b.)  By  railroad  earnings :  The  railroads  are  not  pro- 
ducers of  wealth,  but  transporters.  They  connect  the 
farm  and  the  factory  with  the  consumers.  They  carry 
the  corn,  the  cotton,  the  iron,  and  the  manufactured 
products  to  the  markets.  So  statistics  of  the  gross  earn- 
ings of  the  railroads  afford  an  index  of  trade  conditions. 


244  WORK  OF  WALL  STREET 

"When,  therefore,  one  sees  a  statement  like  this,  "Rail- 
way earnings  for  the  first  week  in  May  increased  6.02 
per  cent,  over  those  of  the  corresponding  week  of  last 
year,  and  19.9  per  cent,  over  the  previous  year,"  it  is  fair 
to  assume  that  trade  is  maintaining  a  rapid  pace.  As 
most  of  Wall  Street  speculation  is  in  railroad  stocks,  and 
as  one-fifth  of  the  nation's  wealth  is  invested  in  railroads, 
it  is  needless  to  say  how  important  from  every  point  of 
view  becomes  the  condition  of  these  properties.  Rail- 
road reports  are  therefore  the  chief  literature  of  Wall 
Street.  They  are  studied  by  its  experts  with  analytical 
skill.  The  weekly  statements  of  gross  earnings  collec- 
tively show  whether  business  has  gained  or  lost.  The 
monthly  statements  show  something  of  the  management 
of  the  railroads,  as  these  give  not  only  the  gross  receipts, 
but  also  the  operating  expenses  and  the  net  earnings.  It 
may  happen  that  while  a  railroad  is  earning  more,  it  is 
also  costing  still  more  to  operate  it ;  in  which  case,  while 
the  gross  earnings  show  an  increase,  the  net  earnings 
reveal  a  decrease,  and  it  is  from  the  net  earnings 
that  interest  and  dividends  are  paid. 

(c.)  By  railroad  cars  in  use:  If  there  is  a  shortage 
of  cars,  it  follows  that  the  business  pressing  for  trans- 
portation is  greater  than  the  facilities.  A  large  surplus 
of  idle  cars  means  depression.  . 

(d.)  By  statistics  of  business  disasters:  The  monthly 
figures  of  commercial  failures  published  by  R.  G.  Dun  & 
Co.  and  Bradstreet  are  very  valuable  indices  to  trade 
conditions.  Those  who  have  learned  how  to  analyze  them 
may  learn  much  concerning  present,  and  at  least  some- 
thing about  future,  conditions.  Next  to  the  records  of 
bank  clearings  they  are  the  most  important  statistics. 

(e.)  By  trade  reviews:  Dun's  and  Bradstreet 's  is- 
sue weekly  reviews  of  trade  from  information  gathered 
from  a  multitude  of  correspondents  throughout  the  coun- 


READING  THE  MARKET  245 

try  and  these  are  highly  regarded  as  authoritative  state- 
ments of  industrial  and  mercantile  conditions. 

(f.)  By  price  index  numbers:  Bradstreet's  in  this 
country  and  The  Economist  in  England  publish  regu- 
larly price  index  numbers,  that  is  to  say  numbers  arrived 
at  on  systems  which  it  is  unnecessary  to  explain,  but 
which  purpose  to  show  the  movement  of  the  prices  of  the 
leading  articles  entering  into  consumption,  so  that  one 
price  number  stands  for  a  multitude  of  prices.  Just  as 
the  speculator  can  read  much  of  the  world 's  history  from 
the  stock  tape,  so  the  business  man  may  gain  much  in- 
formation regarding  fundamental  economic  conditions 
from  a  study  of  prices  of  leading  commodities,  and  the 
price  index  number  is  a  convenient  aid  in  this  study. 
Prices  that  are  very  high  or  very  low  indicate  an  ab- 
normal condition  that  spells  danger  of  one  kind  or  an- 
other. A  rapid  advance  or  decline  in  prices  increasing 
or  reducing  the  cost  of  living  is  of  tremendous  signifi- 
cance to  all  persons,  especially  those  of  fixed  incomes  such 
as  wage  earners  and  investors,  and  in  these  days  of  cor- 
porations a  greatly  increased  number  of  persons  draw 
fixed  salaries  or  fixed  incomes  from  interest  on  their  in- 
vestments. High  prices  for  commodities  usually  depress 
the  prices  of  those  securities  which  bear  a  fixed  rate  of 
interest.* 

Banking. — The    condition   of   the   principal   banks   as 

*  Viewing  the  subject  on  broad  lines,  and  without  going  into  a 
mass  of  detail  of  politico-economical  nature,  a  hint  for  the  practical 
business  man  is  afforded  by  a  contrast  of  the  movements  of  index 
prices  with  those  of  Stock  Exchange  securities.  When  commodities 
advance  prices  of  Stock  Exchange  securities  recede;  when  com- 
modities recede  Stock  Exchange  securities  advance.  This  is  a  gen- 
eral law,  that  is  impressed  by  a  contrast  of  the  movement  of  Con- 
sols and  of  index  prices  for  over  60  years.  Of  course,  such  move- 
ment now  and  again  for  a  time  is  interfered  with  by  political  and 
other  incidents,  but,  spread  over  an  extended  period,  there  is  a  gen- 
eral feature  of  simultaneous  movement  (say,  Consols  rising  and 
commodities  falling,  or  commodities  rising,  and  Consols  falling) 
which  is  very  remarkable. — The  London  Statist. 


246  WORK  OF  WALL  STREET 

shown  by  their  weekly  statements,  especially  the  Banks 
of  England,  France  and  Germany,  and  the  associated 
Clearing-House  banks  of  New  York,  must  be  kept  close 
track  of  by  every  man  of  large  affairs,  for  as  modern 
business  is  carried  on  by  credit,  and  as  credit  is  based 
upon  gold  reserves,  the  credit  capacity  of  these  great 
banks,  and  the  amount  of  gold  which  is  going  into  or 
coming  out  of  them,  either  in  domestic  or  foreign  ex- 
change operations,  are  of  immense  importance  to  the  en- 
tire business  world. 

Corporation  Reports. — These  are  most  valuable,  and 
are  becoming  increasingly  so  as  the  policy  of  corporation 
publicity  is  more  extensively  enforced.  No  economic 
development  of  the  past  ten  years  has  been  more  impor- 
tant than  in  the  application  of  publicity  methods  to  the 
large  corporations,  especially  as  regards  the  fullness  and 
clearness  of  their  financial  statements.  These  are  at 
once  a  guarantee  of  good  faith  to  the  public  and  a  safe- 
guard to  the  investor. 

The  annual  report  is,  or  ought  to  be,  a  complete  state- 
ment of  the  entire  business  of  the  railroad,  containing  a 
financial  balance-sheet,  a  description  of  its  physical  condi- 
tion and  equipment,  and  detailed  reports  of  operations  in 
every  department,  showing  the  different  sources  of  reve- 
nue, the  amount  and  kind  of  freight  carried,  the  number 
of  passengers  transported,  the  various  objects  of  expen- 
diture, the  cost  of  improvements  and  operation,  etc.,  the 
whole  usually  accompanied  by  some  general  account  of 
policy  by  the  president. 

The  annual  reports  of  the  St.  Paul  and  Pennsylvania 
railroads,  and  of  the  United  States  Steel  Corporation  are 
regarded  as  being  excellent  models  for  fullness  of  infor- 
mation. One  must  know  how  to  analyze  a  railroad  report 
in  order  to  be  able  to  use  it  to  the  best  advantage.  It 
must  be  studied  by  comparison  with  preceding  reports  of 


READING  THE  MARKET  247 

the  same  company,  and  with  reports  of  other  lines  in  the 
same  section  of  the  country.  The  object  of  analysis  is 
to  ascertain  the  true  value  of  the  securities  of  the  com- 
pany. Take,  for  instance,  any  given  railroad.  "We  ascer- 
tain, first,  its  mileage.  In  order  to  obtain  the  value  of  a 
piece  of  real  estate  as  compared  with  another  property 
in  the  same  street,  it  is  necessary  to  reduce  both  to  the 
number  of  feet  fronting  on  the  street.  In  like  manner, 
to  compare  the  operations  of  one  road  with  those  of 
another  of  different  length,  it  is  necessary  to  reduce 
every  item  of  income  and  expense  to  per  miles.  Thus 
we  find  how  much  the  capital  stock  is  per  mile,  how 
much  the  gross  earnings  are  per  mile,  what  are  the 
operating  expenses  per  mile,  what  the  fixed  charges  are 
per  mile,  what  the  net  income  or  surplus  is  per  mile, 
and  how  much  this  surplus  amounts  to  on  the  stock.  We 
then  compare  this  exhibit  with  that  of  other  lines  in  the 
same  territory,  study  the  history  of  the  company,  and 
learn  all  we  can  of  the  character  of  its  management.  We 
are  now  prepared  to  form  a  judgment:  1.  Whether  the 
company's  capital  is  or  is  not  above  the  average  issue 
of  lines  in  the  same  territory — in  other  words,  whether  it 
is  or  is  not  overcapitalized.  2.  Whether  the  gross  earn- 
ings per  mile  compare  favorably,  or  otherwise,  with  those 
of  the  other  systems.  3.  Whether  the  percentage  of 
operating  expenses  indicates  economical  management  or 
not.  4.  Whether  the  fixed  charges  are  too  heavy  or 
otherwise.  5.  Whether  the  surplus  applicable  to  dividends 
exceeds  the  dividends  actually  paid,  and  whether  or  not  it 
is  likely  to  increase.  If  the  price  of  the  stock  is  170  and  the 
dividend  is  6  per  cent.,  it  yields  to  the  holder  3.52  per  cent. ; 
but  if  the  net  income  applicable  to  dividends  amounts  to 
9  per  cent.,  that  means  a  possible  yield  of  5.29  per  cent, 
on  the  stock  at  the  market  price.  If  the  history  of  the 
company  shows  consistent,  conservative,  and  honest  man- 
18 


J4^  WORK  OF  WALL  STREET 

agement,  we  are,  with  all  these  facts  in  our  possession, 
prepared  to  determine  whether  the  market  price  is  too 
low  or  too  high.  To  Albert  Fink,  long  Pool  Commis- 
sioner, is  due  the  credit  of  having  given  a  scientific  form 
to  railroad  reports,  and  the  leading  companies  now  con- 
form more  or  less  to  his  ideas.  Those  who  wish  to  get 
a  close  and  critical  view  of  this  scientific  form  should 
consult  Thomas  F.  Woodlock's  "Anatomy  of  a  Railroad 
Report." 

Technical  Position. — In  all  important  lines  of  business, 
all  this  information  must  be  gathered,  studied,  carefully 
analyzed,  and  applied.  But  they  are  particularly  essen- 
tial in  stock  speculation,  which  involves  larger  risks  in 
forecasting  the  future. 

But,  in  addition  to  all  this,  the  stock  speculator  must 
study  the  stock-market  itself  so  as  to  inform  himself  as 
fully  as  he  can  as  to  its  condition:  whether  there  is  an 
over-supply  of  stocks  on  hand  ready  to  be  sold,  or  a 
big  short  interest;  what  certain  influential  "interests" 
or  heavy  operators  are  doing;  whether  the  supply  of 
money  for  speculative  purpose  is,  or  is  not,  to  be  ample ; 
in  other  words  the  whole  technical  position  of  the  market. 
The  following  from  the  financial  page  of  the  New  York 
Sun  gives  an  indication  of  what  is  meant : 

The  week's  stock-market  has  been  of  peculiar  character.  Many 
of  the  prominent  shares,  including  nearly  all  those  which  are 
commonly  called  speculative  leaders,  wavered  back  and  forth  in 
an  uncertain  way,  as  if  professional  operators  were  dubious  in 
their  minds  as  to  the  exact  course,  marketwise,  that  they  should 
pursue;  and  one  or  two  of  these  stocks,  notably  Union  Pacific, 
have  been  distinctly  heavy.  In  fact,  the  weakness  of  Union  Pa- 
cific has  constituted  the  chief  argument  with  speculators  for  sell- 
ing stocks.  No  reason  of  any  substantial  importance  has  pre- 
sented itself  for  a  decline  in  this  issue,  and  the  strong  probabil- 
ity is  that  the  fluctuations  of  the  stock,  which  have  been  highly 
irregular  lately,  have  represented  no  more  than  the  market  op- 


READING  THE  MARKET 


249 


erations  of  two  or  three  large  capitalists  who  are  acting  upon  the 
theory  that  for  the  time  being  a  series  of  profitable  turns  may 
be  made  by  selling  the  stock  when  it  rises  a  few  points  and  buy- 
ing it  after  a  similar  decline. 

Price  Movements, — Much  may  also  be  learned  to  prac- 
tical advantage  by  studying  the  price  movements  of 
stocks,  grain,  and  cotton.  As  nature  is  accustomed  to 
repeat  herself,  although  never  exactly  alike,  so  the 
market  is  accustomed  every  few  years  to  repeat  former 
experiences,  although  never  in  precisely  the  same  way. 
The  student  of  the  market  may  often  by  studying  prices 
be  able  to  distinguish  signs  of  market  repetition.  The 
following  is  a  statement  by  R.  G.  Dun  &  Co.,  of  average 
prices  of  stocks  during  sixty  years,  and  an  inspection  of 
this  table  shows  how  this  law  works : 

AVERAGE    QUOTATIONS    OF   SIXTY   ACTIVE    RAILWAY    STOCKS 


High.     Low. 

High.    Low. 

High.    Low. 

1911 

$107.22    $95.96 

1898. 

$67.04    $52.55 

1885. 

$63.47   $43.45 

1910 

115.21     93.24 

1897. 

59.99     45.64 

1884. 

66.28    38.68 

1909 

116.30    101.16 

1896. 

50.76     40.71 

1883. 

79.86    57.58 

1908 

105.26     79.69 

1895. 

56.07     44.49 

1882. 

94.85    63.77 

1907 

112.25     76.35 

1894. 

52.49     47.37 

1881. 

101.54    69.93 

1906 

120.99    109.83 

1893. 

66.31     41.71 

1880. 

87.04    51.74 

1905 

117.90    106.15 

1892. 

68.49    62.32 

1879. 

67.86    33.85 

1904 

107.76     85.74 

1891. 

66.78     55.29 

1878. 

37.77    25.51 

1903 

109.10     82.62 

1890. 

69.93     53.61 

1877. 

36.33    20.58 

1902 

116.27    101.03 

1889. 

66.29     59.55 

1876. 

47.28    27.58 

1901 

103.98     81.36 

1888. 

65.09     55.71 

1875. 

53.50    36.14 

1900 

84.87     68.49 

1887. 

72.35     59.03 

1874. 

58.79    41.79 

1899 

76.29     66.72 

1886. 

71.99     55.28 

1873. 

69.61    40.83 

"Reading  the  market,"  therefore,  requires  scientific 
knowledge  combined  with  the  art  to  apply  this  knowl- 
edge practically  so  as  to  achieve  results. 

The  speculator  who  does  all  this  can  not  justly  be 
termed  "a  gambler."  He  is  a  close  and  intelligent  stu- 
dent of  risks. 

The  following  account  of  the  year  1911  taken  from 
"Dun's  Review"  is  an  example  of  the  methods  used  in 
reading  the  business  situation: 


250 


WORK  OF  WALL  STREET 


THE  YEAR'S  RECORD. 


1911. 


1910. 


Bank   Clearings    $158,768,000,000 

Railroad   Earnings    $2,395,800,000 

Grain  Crop   (value)    $2,702,458,000 

Cottem  Crop   (bales)    14,385,000 

Pig  Iron   (tons)    23,750,000 

Exports    $1,867,005.000 

Imports   $1,392,500,000 

Commercial   Defaults    $191,061,665 


$162,914,100,000 

$2,423,400,000 

$2,489,000,000 

11.609,000 

27,303,000 

$1,637,056,000 

$1,426,200,000 

$201,757,000 


The  year  just  closed  was  one  of  reasonable  activity  for  a  year 
in  which  great  economic  issues  were  the  subject  of  controversy 
at  home,  and  a  revolution  in  China,  a  waf  between  Italy  and 
Turkey,  and  a  dispute  over  Morocco  that  involved  France,  Ger- 
many and  England,  combined  to  unsettle  the  international  money 
markets.  It  ^was  a  year  in  which  the  inland  trade  in  volume 
was  of  more  than  fair  proportions  and  the  foreign  commerce 
notably  larger  than  in  any  preceding  year.  Measured  by  bank 
clearings  and  railroad  earnings,  1911  was  under  that  of  1910, 
yet  the  reduction  was  so  slight  as  to  indicate  no  pronounced  loss 
of  ground.  Business  fairly  held  its  own.  The  transactions  were 
indeed  of  such  proportions  as  to  show  that,  on  the  whole,  the 
American  people  were  living  well.  Consumption  was  not  equal 
to  productive  capacity  and  in  some  instances  was  far  below  it, 
and  yet  labor  was  well  employed  at  good  wages. 

The  loudest  complaints  come  from  invested  capital,  to  the  ef- 
fect that  existing  uncertainties  made  it  impossible  to  enter  into 
large  new  enterprises.  Nevertheless,  dividend  and  interest  pay- 
ments during  the  year  make  an  aggregate  in  excess  of  other 
years.  The  most  notable  event  of  1911,  from  the  standpoint  of 
national  welfare,  was  the  enormous  cotton  crop,  believed  to  ex- 
ceed 15,000,000  bales;  the  beneficent  effect  of  this  can  scarcely 
be  overestimated.  Already  the  magnitude  of  the  crop  is  serving 
to  bring  about  more  normal  conditions  in  the  long  depressed  cot- 
ton goods  trade,  which  is  now  manifesting  many  signs  of  revival. 
The  grain  crops  did  not  redeem  the  bright  promise  of  early  sum- 


READING  THE  MARKET  251 

mer   and  were  reduced  in  quantity,  but  were  of  greater  value 
than  in  1910. 

The  sudden  revival  in  the  iron  and  steel  trade  in  the  last  three 
months  of  the  year  overshadows  in  importance  the  preceding  de- 
pression, especially  as  it  was  brought  about  by  the  significant 
buying  of  rails  and  equipment  by  leading  railroads.  There  was 
also  a  late  but  pronounced  improvement  in  copper.  The  foreign 
trade  was  of  remarkable  dimensions  and  especially  notable  for 
the  growth  of  exports,  due,  in  no  small  part,  to  the  more  intelli- 
gent and  persistent  pursuit  of  foreign  markets  by  manufacturers 
and  merchants ;  this  contributed  mightily  to  the  strength  of  the 
United  States  in  the  international  money-markets.  There  was  a 
reduction  in  aggregate  liabilities  of  defaulting  concerns.  This 
demonstrated  that  the  position  was  sound  in  spite  of  changes 
brought  about  by  new  conditions.  It  is  noteworthy  that  the  last 
three  months  were  the  best  of  the  year — a  proof  of  improving 
conditions — the  progressive  betterment  being  the  best  promise  for 
the  new  year 

REFERENCES 

"How  to  Read  the  Money  Article,"  Charles  Duguid. 
"The  Anatomy  of  a  Railroad  Report,"  Thomas  F.  Woodlock,  1900. 
"Railroad  Corporations,  How  to  Know  Them,"  J.  Shirley  Eaton, 
1900. 


CHAPTER  XVIII 
THE    CREDIT    INSTITUTIONS    AND    THE    CLEARING-HOUSE 

Addressing  an  assemblage  of  bankers,  early  in  1902, 
Lyman  J.  Gage,  then  Secretary  of  the  Treasury,  said  that 
the  nomenclature  of  the  Street  ought  to  be  changed; 
and  that  instead  of  speaking  of  rates  for  money,  we 
should  use  the  term  "rates  for  credit."  It  has  already 
been  shown  that  what  is  called  the  stock-market  is  really 
an  income  market.  In  like  manner  what  is  called  the 
money-market  is  in  reality  a  credit  market.  As  Mr. 
Gage  shows,  when  rates  for  money  are  high,  people  be- 
come alarmed  about  the  scarcity  of  money  as  indicated 
by  these  high  rates,  when  substantially  there  has  been 
no  change  in  the  volume  of  money,  either  in  the  hands  of 
the  people  or  in  any  under  control  of  the  banks.  What 
ought  to  be  quoted  is  not  money,  but  credit.  It  is  credit 
that  is  getting  difficult,  not  actual  money  that  is  be- 
coming scarce.  Macleod,  the  English  economist,  also 
defines  the  money-market  as  a  credit  market,  and  speaks 
of  a  bank  as  "a  manufactory  of  credits."  The  banker  is 
a  credit  merchant.  He  buys  the  less  known  credit  of 
other  people  and  then  sells  at  a  higher  price  his  own 
better  established  credit. 

Credit  Operations. — Wall  Street  is  not  exceptional  in 
carrying  on  the  vast  bulk  of  its  operations  on  credit. 
Dr.  David  Kinley,  of  the  University  of  Illinois,  estimates  * 
that  from  80  to  85  per  cent,  of  the  total  business  of  the 
United  States  is  done  by  the  use  of  credit  instruments — 
from  50  to  60  per  cent,  in  the  case  of  retail  trade  and 
over  90  per  cent,  in  the  case  of  wholesale  trade.  The 

*  See  Document  399  of  Monetary  Commission  publications. 

252 


THE  CREDIT  INSTITUTION  AND  CLEARING-HOUSE         253 

merchant,  as  well  as  the  broker,  goes  to  the  bank  for 
credit.  "Commerce,"  said  Daniel  "Webster,  "can  not 
exist  without  credit.  Credit  is  the  vital  air  of  the  sys- 
tem. It  has  done  more,  a  thousand  times,  to  enrich 
nations  than  all  the  mines  of  the  world."  Credit  makes 
one  dollar  do  the  work  of  many  dollars.  Some  of  the 
old  prejudice  against  money-lenders  still  exists,  and  in 
certain  sections  of  our  country  bankers  are  even  now 
held  in  distrust  and  fear.  It  is  the  distrust  and  fear  of 
ignorance.* 

Value  of  Credit. — It  has  been  said  that  the  man  who 
makes  two  blades  of  grass  grow  where  one  grew  before 
is  a  benefactor  of  his  kind.  Then  certainly  a  man  who 
can,  by  the  credit  system,  multiply  the  usefulness  of  a 
dollar  is  equally  a  public  benefactor.  Money  inert,  un- 
used, is  of  no  benefit.  It  is  only  when  put  in  use  that 
money  becomes  of  value.  In  storage  it  is  a  burden;  in 
action  a  beneficence.  It  is  never  more  in  action  than 
when  made  the  basis  for  credit.  It  is  for  this  reason 
that  a  large  surplus  held  by  the  Treasury  becomes  an 
evil.  The  Government,  least  of  all,  can  afford  to  be  a 
hoarder  of  money.  Economists  in  fact  hold  that  money 
itself  is  only  a  high  form  of  credit,  a  bill  of  exchange 
to  facilitate  commerce,  though  we  employ  as  the  basis 
of  all  money,  gold,  a  product  of  stable  and  constant  value 
that  is  a  part  of  the  general  wealth.  The  hoarding  of 
money  is,  therefore,  a  contraction  of  credit  and  a  blow 
to  business  activities  and  national  prosperity. 

The  extent  to  which  the  banks  multiply  the  power  of 
money  through  their  system  of  credit  is  shown  in  a 
striking  manner  by  statistics  gathered  from  the  report 

*  Andrew  Jackson  in  a  letter  confessed  that  he  was  opposed  not 
merely  to  the  United  States  bank  but  to  all  banks.  His  prejudice 
is  of  the  same  kind  as  exists  to-day  against  corporations;  and 
springs  out  of  a  failure  to  distinguish  between  beneficent  use  and 
injurious  abuse. 


254  WORK  OF  WALL  STREET 

of  the  Controller  of  the  Currency.  On  June  30,  1910, 
the  aggregate  deposits  of  all  the  banks  and  trust  com- 
panies in  the  United  States  amounted  to  $15,283,396,254, 
while  the  actual  money  held  was  $1,414,600,000.  Thus 
the  amount  of  credit  held  subject  to  demand  was  over 
ten  times  as  great  as  the  amount  of  money  held  in  reserve. 
On  the  30th  of  December,  1911,  the  Clearing-House  of 
New  York  held  deposits  of  $1,723,362,000,  while  the 
amount  of  actual  coin  and  legal  tenders  held  was 
$406,240,000  or  about  24  per. 'cent,  of  the  deposits.  In 
Great  Britain  the  proportion  of  credits  to  cash  reserve 
is  even  greater  than  in  this  country,  and  as  credit  is  one 
of  the  principal  elements  of  wealth,*  this  fact  explains, 
in  part,  England's  immense  financial  power. 

The  capitalist  is  a  man  who  uses  his  own  money  and 
credit  in  the  transaction  of  business.  A  banker  uses  his 
own  money  and  credit  as  well  as  the  money  and  credit  of 
others  intrusted  to  him  in  the  transaction  of  business.  On 
the  one  hand,  there  are  individuals  who  possess  money, 
but  have  no  immediate  business  or  investment  in  which 
to  employ  it ;  so  they  deposit  it  in  banks  for  convenience, 
safe-keeping,  and  in  some  instances  to  draw  interest 
upon  it.  Other  individuals  are  in  business  and  need 
money  or  credit  to  carry  it  on ;  these  go  to  the  banks  and 
borrow  it  at  the  prevailing  rate  of  interest.  As  the 
broker  is  an  agent  between  buyers  and  sellers,  so  the 
banker  is  an  agent  between  borrowers  and  lenders.  In 
the  complexity  of  his  affairs  the  modern  business  man, 
however,  may  become  at  the  same  time  both  a  borrower 
and  a  lender.  He  is  constantly  depositing  credits  in  the 
bank,  and  at  the  same  time  is  drawing  them  out  in  the 
shape  of  loans. 

Lending  of  money  or  extending  of  credits,  as  a  busi- 

*  If  wealth  consists  in  those  things  which  man  most  desires  and 
which  possesses  exchangeable  value,  then  credit  is  wealth. 


THE  CREDIT  INSTITUTION  AND  CLEARING-HOUSE         255 

ness,  is  carried  on  by  individuals  who  are  known  as  pri- 
vate bankers  and  by  corporations  called  banks,  a  name 
so  old  that  there  is  a  dispute  as  to  its  origin.  The  first 
banks  served  only  the  purpose  of  providing  money  for 
Government  uses.  Then  they  became  depositories  for 
safe-keeping  of  money,  and  vehicles  for  its  transfer  from 
one  locality  to  another.  Gradually  they  have  assumed 
other  functions  of  banking,  such  as  the  issuing,  lending, 
and  borrowing  of  money. 

Savings  Banks. — There  are  various  kinds  of  banks. 
Savings  banks  receive  deposits  on  which  they  pay  in- 
terest, and  loan  money  on  real  estate  or  invest  in  United 
States  bonds  and  other  safe  securities  under  restrictions 
prescribed  by  law.  They  are  created  primarily  for  the 
philanthropic  purpose  of  taking  the  small  savings  of 
working  people  and  investing  them  in  a  way  that  will  be 
safe  and  profitable.  Security  is  the  first  great  considera- 
tion in  a  savings  institution ;  income  comes  second.  There 
is  only  one  savings  bank  in  Wall  Street,  and  as  a  class 
these  institutions  have  no  connection  with  the  Street  as  a 
speculative  center,  but  they  figure  largely  in  the  invest- 
ment market. 

Commercial  Banks. — Commercial  banks  are  institutions 
both  of  deposit  and  discount;  that  is  to  say,  they  receive 
deposits  subject  to  withdrawal  by  check  and  lend  on 
securities  or  negotiable  paper.  National  and  State  banks 
are  of  this  class.  But  the  National  banks  are  also  banks 
of  issue  or  circulation.  They  have  the  right  under  cer- 
tain restrictions  to  issue  notes  which  circulate  the  same 
as  Government  money.  These  are  secured  by  United 
States  bonds  deposited  with  the  Treasury  Department. 
State  banks  do  not  issue  notes,  as  there  is  a  prohibitory 
tax  of  10  per  cent,  upon  State  bank  circulation. 

Trust  Companies. — Trust  companies  receive  and  loan 
money  like  commercial  banks,  and  can  also  loan  on  real 


256  WORK  OF  WALL  STREET 

property.  Moreover,  they  accept  and  execute  trusts, 
acting  as  trustees  for  estates  and  corporations.  They 
were  formerly  supposed  not  to  do  a  general  banking 
business  or  to  allow  clients  to  draw  on  their  deposits  by 
check.  A  few  of  the  companies  still  limit  their  business 
strictly  to  the  original  plan,  but  nearly  all  of  them  have 
broadened  out  so  as  to  do  business  the  same  as  National 
and  State  banks,  and  also  to  underwrite  securities  like 
private  bankers.  They  cannot,  however,  issue  notes. 

Private  Bankers. — The  private  bankers  do  business 
much  the  same  as  incorporated  banks.  They  receive  and 
loan  money.  They  act  as  financial  agents  for  domestic 
corporations  and  foreign  banking-houses.  They  under- 
write new  issues  of  securities.  They  issue  letters  of 
credit.  They  deal  in  foreign  exchange,  and  most  of  them 
export  and  import  gold  when  the  occasion  requires. 

National  Banks. — Of  these  various  classes  of  money- 
lenders the  most  important  are  the  National  banks.  A 
statement  by  the  Controller  of  the  Currency  shows  that 
on  December  5,  1911,  the  National  banks  in  New  York 
City  held  as  deposits  of  other  banks  and  trust  companies 
$627,191,958,  the  amount  due  in  individual  deposits  being 
$686,417,818.  The  National  banks  are  also  depositories 
for  a  heavy  amount  of  the  Treasury  surplus.  Practically 
the  cash  reserves  of  the  National  banks  form  the  basis 
on  which  rests  the  vast  output  of  all  credit. 

Reserve  Cities. — The  National  banking  law  creates 
what  are  known  as  Central  Reserve  and  Reserve  Cities, 
New  York  being  the  most  important  of  three  central 
reserve  cities.  The  National  banks  in  these  cities  are 
obliged  to  maintain  at  all  times  a  reserve  *  in  specie  and 

*  The  rigid  reserve  requirement  of  the  National  banks,  while  it 
has  its  advantages,  has  alsb  its  weakness.  A  money  reserve  like  an 
army  reserve  should  be  held  for  use  in  an  emergency.  If  it  cannot 
be  used  in  an  emergency  then  it  is  worse  than  useless  as  a  reserve. 
In  actual  emergencies  therefore  the  reserve  law  is  to  a  large  extent 


THE  CREDIT  INSTITUTION  AND  CLEARING-HOUSE         257 

legal  tenders  equal  to  25  per  cent,  of  the  total  deposits. 
But  they  are  permitted  to  receive  as  deposits,  on  which 
interest  is  paid,  one-half  of  the  legal  reserves  which  Na- 
tional banks  in  the  other  reserve  cities  of  the  country 
are  required  to  keep.  The  banks  of  these  interior  cities, 
therefore,  have  the  advantage  of  earning  interest  on 
one-half  of  their  reserves,  while  the  New  York  banks 
have  the  advantage  of  the  power  which  comes  to  them 
as  the  holders  of  the  deposits  of  country  banks.  Country 
banks  are  allowed  to  deposit  60  per  cent,  of  their  reserve 
in  reserve  and  central  reserve  cities. 

Of  the  total  specie  and  legal  tenders  held  by  the  Na- 
tional banks  of  the  United  States  on  December  5,  1911, 
over  30  per  cent,  was  on  deposit  in  New  York  City.  It 
is  as  a  depository  of  reserves  that  Wall  Street,  there- 
fore, acquires  its  standing  as  a  money  center;  and  every 
great  nation  must  have  such  a  center.  Even  if  there 
were  no  law  permitting  interior  banks  to  deposit  part 
of  their  reserves  in  New  York,  they  would  still  deposit 
there,  for  it  is  to  the  advantage  of  the  whole  country 
that  there  shall  be  in  one  place  a  great  storehouse  of 
reserves,  large  enough  to  finance  the  commerce  and  enter- 
prise  of  the  nation.  Any  attempt  to  compel  by  legal 
enactment  banks  to  keep  all  their  money  "at  home" 
would  be  contrary  to  the  higher  economic  law,  although 
it  is  equally  true  that  every  bank  ought  to  keep  an  ade- 
quate reserve  in  its  own  vaults.  In  London  the  joint 
stock  banks  have  in  recent  years  been  compelled  to  main- 
tain larger  individual  reserves  instead  of  keeping  all 
their  money  in  the  Bank  of  England. 

Money  has  a  magnetic  power,  and  the  needle  of  the 
financial  compass  steadily  points  toward  New  York.  But 
while  it  has  this  power,  it  also  has  the  responsibilities 

suspended  and  the  banks  draw  on  their  reserves  to  protect  the 
business  situation. 


258  WORK  OF  WALL  STREET 

which  attach  to  power;  and  when  any  section  of  the 
country  is  in  financial  need,  by  reason  of  harvested  crops 
that  must  be  moved  to  markets,  or  by  any  other  cause,  it 
is  New  York  that  must  furnish  most  of  the  relief. 

Growing  Size  of  Banks. — In  recent  years  there  has 
been  a  notable  expansion  in  the  size  of  the  money-market. 
Wall  Street  has  required  larger  banking  machinery. 
The  formation  of  great  syndicates  and  immense  corpora- 
tions have  called  for  banks  of  larger  capital  and  re- 
sources. Syndicates  that  are  conducting  operations  in- 
volving tens  and  perhaps  hundreds  of  millions  of  dollars 
require  accommodations  that  would  have  seemed  incredi- 
ble a  few  years  ago.  So  two  banks  have  increased  their 
capital  to  $25,000,000  each,  and  another  has  increased 
to  $10,000,000  and  has  a  surplus  of  over  $21,000,000  in 
addition.  Others  have  augmented  their  facilities  in 
many  ways.  Large  State  banks  have  established  numer- 
ous branches.  Several  of  the  principal  banks  are  allied 
with  the  most  powerful  private  bankers  and  individual 
capitalists  and  corporations.  Of  the  66  banking  institu- 
tions in  the  Clearing-House  with  a  total  capital  and  net 
profits  of  $458,606,800  reported  in  the  beginning  of  1912, 
there  are  9  whose  capital  and  net  profits  amount  to 
$229,438,800.  Therefore,  nine  institutions  are  as  large 
as  the  remaining  57.  Of  the  total  net  deposits  of  the 
Clearing-House  on  January  13,  1912,  amounting  to 
$1,804,727,000,  ten  institutions  out  of  66  held  $963,872,000 
or  over  53  per  cent. 

Whether  this  concentration  of  the  money  power  is  a 
thing  to  be  feared  or  welcomed,  is  a  question  that  is 
scarcely  germane  to  the  purpose  of  this  book.  Every 
one  will  answer  it  in  accordance  with  his  own  point  of 
view.  It  is  practically  the  same  question  that  is  in- 
volved in  the  organization  of  the  trusts  and  the  con- 
solidation of  the  railroads.  It  is  the  same  question  that 


THE  CREDIT  INSTITUTION  AND  CLEARING-HOUSE         259 

is  put  in  the  chapter  on  the  private  banking  houses.  As 
is  suggested  there,  concentration  is  not  to  be  judged  so 
much  by  its  size  as  by  its  acts.  Concentration  of  capital 
and  credit  is  greatly  to  be  desired  when  it  is  a  power 
beneficently  used.  When  it  is  abused  it  is  greatly  to 
be  dreaded.  But  that  is  equally  true  of  political  power 
whether  exercised  by  a  despotism  or  a  democracy.  Ma- 
jorities may  make  their  power-  a  fearful  menace.  The 
financial  *  concentration  has,  on  the  whole,  exercised  its 
power  for  the  good  of  the  country,  and  the  kind  of  co- 
operation which  it  represents  is  something  very  different 
from  "a  money  trust,"  the  term  which  the  enemies  of 
Wall  street  have  applied  to  it. 

Competition. — It  should  be  remembered  that  along  with 
this  growth  in  the  size  of  banks,  there  is  also  an  intense 
competition  between  the  banks.  Just  as  the  stock- 
market  is  open  at  all  times  to  anyone  who  may  wish  to 
enter  it,  so  the  money-market  is  open  to  all  who  may 
possess  the  credit  to  command  its  resources. 

The  Clearing-House. — Sixty-six  of  the  National  and 
State  banks  and  Trust  Companies  of  New  York  are  mem- 
bers of  the  Bank  Clearing-House, t  and  other  banks  and 
Trust  Companies  of  the  city,  and  of  Hoboken  and  Jersey 
City,  clear  through  the  member  banks.  The  Subtreasury 
is  also  a  member  of  the  Clearing-House  and  makes  its 
daily  exchanges  there.  This  institution,  established  in 

*  It  is  by  reason  of  financial  regulation  and  money  centralization 
under  established  laws  of  prudence  in  banking  that  rates  of  interest 
are  lower  in  the  city  than  in  the  country,  and  lowest  in  the  most 
concentrated  and  most  efficiently  financed  centers. 

C.  W.  BARROX. 

f  The  Clearing-House  is  an  institution  by  which  all  the  banks 
which  join  in  it  are  formed,  as  it  were,  into  one  huge  banking  in- 
stitution for  the  purpose  of  transferring  credits  from  one  bank  to 
another  without  the  use  of  coin,  just  in  the  same  way  as  credits 
are  transferred  from  one  account  to  another  in  the  same  bank  with- 
out the  use  of  coin. 

HENRY  D.  MACLEAD. 


200  WORK  OF  WALL  STREET 

1853,  and  whose  building  in  Cedar  Street  is  one  of  the 
architectural  ornaments  of  the  city,  clears  the  immense 
exchanges  of  New  York  which  amount  to  60  per  cent, 
of  the  clearings  of  the  United  States.  It  performs  the* 
same  office  for  the  banks  that  the  Stock  Clearing-House 
does  for  the  stock-brokers.  During  the  fiscal  year  end- 
ing October  1,  1910,  the  exchanges  of  the  Clearing-House 
banks  amounted  to  $102,553,959,069.  It  is  obvious  that 
if  this  stupendous  sum  represented  actual  deliveries  in 
payment  of  checks  and  drafts,  if  each  bank  had  to  send 
to  every  other  bank  to  make  collections,  and  its  mes- 
sengers obliged  to  carry  back  the  money  due  their  bank, 
in  specie  or  legal  tenders,  the  business  of  New  York 
would  be  so  congested  as  to  produce  a  blockade  or  par- 
alysis. But  by  meeting  in  the  Clearing-House  and  there 
ascertaining  what  each  institution  owes  the  others,  and 
by  a  simple  and  ingenious  method  of  clearances,  establish- 
ing balances  which  are  settled  by  cash  payments,  the 
immense  business  of  the  banks  is  conducted  as  easily  and 
safely  as  if,  instead  of  sixty-six  banks,  there  was  only 
one,  and  all  transactions  passed  through  its  doors.  It 
takes  less  than  an  hour  to  clear  a  day's  exchanges.  The 
$102,000,000,000  of  exchanges  in  1910  were  settled  by  pay- 
ments of  cash  balances  aggregating  only  $4,195,293,966. 
In  other  words,  the  Clearing-House  eliminated  about 
$98,000,000,000  that  would  have  had  to  be  paid  in  actual 
delivery  and  individual  settlement  of  every  item.  The 
percentages  of  balances  to  clearances  was  only  4.09.  In 
one  year  it  was  under  3,  and  the  average  percentage 
since  1854  is  under  5.  The  exchanges  of  May  10,  1901, 
amounting  to  $598,537,409,  were  settled  by  payments  of 
balances  amounting  to  $23,873,115.  In  one  day  in  May, 
1902,  the  Chatham  Bank  settled  its  exchanges,  amount- 
ing to  $1,323,694,  by  receiving  a  balance  of  ten  cents. 
Method  of  Clearing. — The  method  of  clearing  is,  as  has 


THE  CREDIT  INSTITUTION  AND  CLEARING-HOUSE         261 

been  said,  exceedingly  simple.  Each  member  bank  sends 
to  the  Clearing-House  every  day  two  clerks,  one  of  whom 
presents  to  each  of  the  other  banks  in  turn  the  checks 
and  drafts  which  it  holds  up'on  it,  while  the  other  clerk 
receives  the  checks  presented  against  it  by  the  other 
banks.  It  ordinarily  takes  only  a  few  minutes  to  make 
these  exchanges,  the  operation  moreover  being  facilitated 
by  the  fact  that  an  hour  earlier  seven  of  the  biggest 
institutions  clear  their  mutual  exchanges  by  themselves. 
As  soon  as  the  exchanges  are  effected  it  is  a  simple 
operation  to  ascertain  which  banks  are  creditors  and 
which  are  debtors.  The  debtor  banks  have  then  a  few 
hours  in  which  to  make  payment  of  their  debit  balances, 
payment  being  made  not  to  individual  banks  but  to  the 
Clearing-House,  which  distributes  the  amount  to  the  insti- ' 
tutions  which  are  creditors.  Of  course,  the  credits  and 
debits  must  exactly  balance,  and  while  a  large  sum  of 
money  changes  hands,  not  a  cent  remains  with  the  Clear- 
ing-House at  the  close  of  the  day.  Payments  may  be 
made  in  two  ways : 

(a.)     In  United  States  money; 

(b.)  In  Clearing-House  certificates  representing  de- 
posits by  member  banks  in  the  vaults  of  the  Clearing- 
House  of  gold  and  legal  tenders. 

The  manager  or  assistant  manager  of  the  Clearing- 
House  presides  at  the  daily  clearings,  but  so  simple  is  the 
system  that  ordinarily  there  is  little  for  him  to  do  except 
to  maintain  order  and  impose  fines  for  unnecessary  de- 
lays, although  these  and  the  other  duties  of  these  offi- 
cials are  very  responsible,  requiring  men  of  the  highest 
character  and  efficiency.  Even  in  the  week  of  the 
Equitable  Building  fire  in  January,  1912,  when  the  clear- 
ances had  to  be  carried  on  in  the  Hall  of  the  Chamber 
of  Commerce  in  Liberty  Street,  because  access  to  the 
Clearing-House  building  in  Cedar  Street  was  impossible, 


262  WORK  OF  WALL  STREET 

the  exchanges  were  made  without  delay  and  the   bal- 
ances paid  to  the  last  cent. 

Other  Clearing-House  Functions. — But  the  Clearing- 
House  has  more  important*  functions  than  even  that  of 
providing  the  machinery  for  clearances,  though  that  was 
its  first  duty.  It  assists  solvent  banks  temporarily  em- 
barrassed and  saves  them  from  suspension.  In  times  of 
imminent  panic,  it  issues  Clearing-House  loan-certificates, 
and  thus  prevents  what  might  result  in  a  condition  of 
general  banking  and  commercial  insolvency.  The  loan- 
certificates  thus  issued  in  times  of  dire  emergencies  are 
in  the  nature  of  "temporary  loans  made  by  the  banks 
associated  together  as  a  Clearing-House  Association  to 
the  members  thereof,  for  the  purpose  of  settling  Clearing- 
House  balances."  They  are  a  species  of  fiat  money,  cir- 
culating only  at  the  Clearing-House,  and  retired  as  soon 
as  the  danger  of  panic  is  over.  The  Clearing-House 
establishes  rates  of  charges  for  collections  of  out-of-town 
checks.  It  has  also  been  more  than  once  proposed 
that  it  should  add  another  and  still  more  important  func- 
tion, that  of  fixing  a  daily  rate  for  call  loans.  A  com- 
mittee of  bankers,  it  has  been  suggested,  should  be  ap- 
pointed to  meet  every  day  and  determine  what  the  rate 
of  call  loans  should  be  for  that  day,  and  this  rate  would 
be  binding  on  all  the  member  banks  and  the  institutions 
that  cleared  through  them.  The  membership  of  this  com- 
mittee under  such  a  system  would  be  changed  frequently, 
say  once  every  month.  The  system  would  give  the  Clear- 
ing-House much  of  the  power  now  exercised  by  the  Bank 
of  England,  which,  by  its  rate  of  discount,  safeguards 
the  English  money-market  and  prevents  many  monetary 
panics.  It  has  also  been  suggested  that  the  Clearing- 
House  should  fix  a  common  rate  of  interest  to  be  paid  by 
the  New  York  banks  on  the  deposits  of  country  banks. 
Neither  proposition  has,  however,  been  adopted,  possibly 


THE  CREDIT  INSTITUTION  AND  CLEARING-HOUSE         263 

through  fear  that  the  act  would  be  interpreted  as  an 
attempt  to  create  a  monopoly  in  money. 

Expansion  of  Clearing-House. — In  1911  there  was  a 
most  notable  extension  of  the  scope  and  effectiveness  of 
the  Clearing-House.  It  admitted  to  membership  most  of 
the  trust  companies  of  the  city,  under  a  satisfactory 
agreement  as  to  the  amount  of  reserves  the  trust  com- 
panies should  be  compelled  to  carry  in  their  own  vaults, 
and  the  amount  which  could  be  held  on  deposit  with 
member  banks.  The  admission  to  the  Clearing-House 
immensely  strengthened  the  financial  position  of  the 
whole  country;  and  it  had  also  the  incidental  and  by 
no  means  inconsequential  advantage  of  making  the 
weekly  Clearing-House  bank  statement  more  valuable 
by  making  it  a  more  complete  exhibit  of  banking  condi- 
tions in  New  York.  This,  therefore,  is  a  notable  expan- 
sion of  financial  publicity. 

Another  great  improvement  in  the  New  York  Clearing- 
House  has  been  the  establishment  of  a  system  of  examina- 
tions of  member  institutions  and  the  employment  of  a 
staff  of  competent  examiners  *  for  this  purpose.  This 
enables  the  Clearing-House  to  keep  a  closer  watch  on  its 
members  for  the  common  interest  of  all,  thus  affording 
a  larger  protection  against  unsound  banking  and  the 
liability  to  insolvency. 

Clearances  in  the  United  States. — There  are  111  Clear- 
ing-Houses  in  the  United  States  whose  exchanges  in  1911 
amounted  to  $159,999,959,528.  Collectively  they  are  the 
conservators  of  the  credit  and  business  of  the  country. 
They  administer  their  supreme  trust  with  magnificent 
efficiency  and  justice.  They  demonstrate  the  possibilities 


*  One    chief    with    twelve    assistants.     Nearly    twenty    American 
Clearing-Houses   have  now   adopted   a   system   of  examinations   sup- 
plementary to   the   examinations   conducted   under   the   direction   of 
the  Comptroller  of  the  Currency. 
19 


264  WORK  OF  WALL  STREET 

of  intelligent  and  fair  cooperation  which  is  the  funda- 
mental principle  of  modern  commerce  and  industry. 

Plant  of  the  Money-Market. — The  Clearing-House,  the 
banks,  and  the  trust  companies  constitute  what  may  be 
termed  the  plant  of  the  money-market.  The  bank  offi- 
cials, the  private  bankers,  and  the  money  and  exchange 
brokers  are  the  skilled  workmen  who  operate  this  plant. 
These  brokers  are  men  who  make  a  business  of  buying 
and  selling  mercantile  paper  or  bills  of  exchange,  while 
others  loan  the  money  of  the  banks  to  members  of  the 
Stock  Exchange.  The  plant  is  constantly  expanding  in 
order  to  provide  the  facilities  for  the  expanding  require- 
ments of  business.  Every  large  bank,  for  instance,  is 
divided  into  a  number  of  distinct  although  co-related  de- 
partments each  under  an  expert  manager.  Thus  there 
is  a  foreign  exchange  department  and  usually  a  bond  de- 
partment. One  of  the  big  New  York  banks  in  1911 
handled  $550,000,000  of  bonds. 

REFERENCES 

A  bibliography  of  all  books  published  on  money,  currency  and 
banking  would  itself  make  a  book.     Charles  A.  Conant,  in  a  bibli- 
ography of  one  hundred  and  three  works,   names  the  following 
sixteen  publications  as  furnishing  "a  satisfactory   beginning  to- 
ward a  library  for  a  student  of  money  and  banking" : 
"The  Canadian  Banking  System,"  R.  M.  Breckenridge,  1894. 
"The  Evolution  of  Modern  Money,"  W.  W.  Carlile,  1901. 
"The  A.  B.  C.  of  the  Foreign  Exchanges,"  George  Clare,  1896. 
"Traite  Theorique  et  Pratique  des  Operations  de  Bauque,"  J.  G. 

Courcelle-Senevid,  1876. 
"Bimetallism,"  Leonard  Darwin,  1898. 
"Chapters  on  the  Theory  and  History  of  Banking,"   Charles  F. 

Dunbar,  1897. 

"La  Libert§  des  Banques,"  J.  E.  Horn,  1866. 
"Money  and  the  Mechanism  of   Exchange,"   W.   Stanley  Jevons, 

1893. 

"A  Study  of  the  Theory  of  the  Medium  of  Exchange,"  David  Kin- 
ley,  1904. 


THE  CREDIT  INSTITUTION  AND  CLEARING-HOUSE         265 

"La  Monnaie  dans  1'Autique,"  Francois  Lenorniant,  1878. 

"History  of  the  Greenbacks,"  Wesley  C.  Mitchell,  1903. 

"The  Work  of  Wall  Street,"  Sereno  S.  Pratt. 

Report  of  the  Monetary  Commission  of  the  Indianapolis  Conven- 
tion, 1898. 

"Money,"  Francis  A.  Walker,  188G. 

"Fundamental  Problem  in  Monetary  Science,"  C.  M.  Walsh,  1901. 

"Money  and  Banking,"  Horace  White,  1902. 

To    this   list    should   be   added    Mr.    Conant's    own    admirable 

works : 

"Principles  of  Money  and  Bank,"  1905 ;  and 

"Modern  Banks  of  Issue." 
The  following  books  should  also  be  consulted : 

"Lombard  Street,"  Walter  Bagehot,  1873. 

"Clearing  Houses,  Their  History,  Methods  and  Administration," 
James  G.  Cannon,  1910. 

"Credit  and  Its  Uses,"  William  A.  Prendergast,  1910. 

"The  Banks  of  New  York,"  T.  S.  Gibbins,  1859. 

"History  of  Banking  in  Great  Britain,"  Henry  D.  Macleod,  1896. 

"Monetary  Systems  of  the  World,"  Maurice  L.  Muhleman. 

Publications  of  the  National  Monetary  Commission,  1910-1911. 

"Funds  and  Their  Uses,"  F.  A.  Cleveland,  1902. 

"The  Modern  Bank,"  A.  K.  Fiske,  1904. 

"Investigations   in   Currency   and   Finance,"   W.    Stanley  Jevons, 
1884. 

"The  Bank  and  the  Treasury,"  F.  A.  Cleveland,  1905. 

"Money  and  Banking,"   Earl   Dean   Howard  and  Joseph  French 
Johnson,  1910. 


CHAPTER  XIX 

THE    USE    OF    CREDIT    IN    STOCK    EXCHANGE    TRANS- 
ACTIONS 

The  credit  which  Wall  Street  uses  in  its  various  oper- 
ations is  obtained  primarily  from  the  banks  and  trust 
companies  in  the  financial  district.  While  it  is  true  that 
not  all  of  these  institutions  are  what  may  be  called 
"Stock  Exchange  banks,"  and  a  number  of  them  pay 
much  more  attention  to  financing  trade  and  commerce 
than  to  financing  the  issue  and  sale  of  securities,  yet 
nearly  all,  if  not  all,  bear  some  relation  to  the  security 
market,  and  many  of  them  deal  largely  with  brokers. 

Out  of  Town  Loans. — In  addition  to  these  local  insti- 
tutions the  stock-market  obtains  a  large  amount  of  credit 
in  the  shape  of  direct  loans  made  by  banks  and  trust 
companies  in  interior  cities,  carrying  on  this  business 
through  their  bank  correspondents  in  New  York.  At 
times  the  aggregate  of  this  invisible  credit  affects  ma- 
terially the  position  of  the  money-market.  In  1906  it 
was  estimated  that  the  loans  of  outside  banks  in  New 
York  amounted  to  $300,000,000.  Wall  Street  likewise  at 
times  obtains  credit,  in  imposing  amounts,  from  European 
money  centers. 

Money  and  Securities. — The  different  ways  in  which 
the  money-  and  the  stock-markets  meet  are  concisely  but 
comprehensively  summed  up  by  Professor  Jacob  H.  Hol- 
lander as  follows : 

(1.)  Stock  exchange  securities  are  used  as  collateral  to  secure 
mercantile  discounts  and  personal  loans  in  the  insufficiency  of 
commercial  or  personal  credit. 

(2.)  In  the  interval  between  original  sale  and  ultimate  ab- 

266 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         267 

sorption  by  investors  newly  issued  corporate  securities  are  used 
by  underwriting  syndicates  and  syndicate  participants  to  secure 
bank  advances. 

(3.)  Banking  institutions  invest  in  stock  exchange  securities 
such  part  of  their  resources  as  are  not  employed  in  loans  and  dis- 
counts in  consideration  of  interest  return  and  in  anticipation, 
semi-speculatively,  of  appreciation  in  market  value. 

(4.)  Bond  houses  and  stock-brokers  engaged  in  the  sale  of  in- 
vestment securities  obtain  bank  loans  as  working  capital  upon 
xinsold  holdings. 

(5.)  Speculative  purchases  of  stock  exchange  securities  are 
financed  partly  by  time  loans,  but  in  the  main  by  demand  loans 
obtained  from  banking  institutions  and  secured  by  such  securities 
as  collateral. 

To  which  should  be  added  the  process  known  as  cer- 
tification of  brokers'  cheeks. 

How  Brokers  Obtain  Credit. — It  is  of  chief  interest  to. 
the  student  of  the  Wall  Street  system  to  inquire  into  the 
methods  employed  by  members  of  the  Stock  Exchange 
in  obtaining  their  credit  in  the  purchase  and  sale  of 
securities  for  investment  and  speculation. 

It  has  been  seen  that  while  the  stock-broker  executes 
orders  for  his  customer  on  usually  10  per  cent,  margin, 
he  is  obliged  to  pay  for  the  securities  in  full  upon  de- 
livery. It  would  be  manifestly  impossible  for  any  broker 
to  do  this  without  borrowing  money  from  the  banks. 
He  has  extended  credit  to  his  customer;  he  must  him- 
self get  credit  from  the  banks.  For  instance,  a  broker 
buys  5,000  shares  of  New  York  Central  at  110,  amount- 
ing to  $550,000.  But  he  executes  the  order  for  his  cus- 
tomer on  a  margin  of  $55,000,  so  that  he  must  pay  the 
difference  of  $495,000,  either  out  of  his  own  capital  or 
else  borrow  of  the  banks.  Necessity  compels  him  to  go 
to  the  banks.  He  takes  the  5,000  shares  of  the  New  York 
Central  to  the  banks  and  offers  them  as  a  collateral  for 
a  loan.  If  he  is  wise,  he  already  has  an  agreement  with 


268  WORK  OF  WALL  STREET 

his  customers  enabling  him  to  do  this.  The  banks  lend 
him  $440,000  on  the  collateral  at  the  prevailing  rate  of 
interest.  With  the  $55,000  from  his  customer  and  $440,- 
000  from  the  banks,  the  broker  has  $495,000,  or  $55,000 
less  than  he  must  pay  for  the  stock.  This  he  would  have 
to  supply  out  of  his  own  capital. 

"What  is  the  net  result  ?  The  customer  is  nominally  the 
owner  of  5,000  shares  of  stock,  which  he  has,  however, 
never  seen,  and  which  is  actually  in  possession  of  banks 
whose  very  names  he  may  not  know.  The  interest  of 
the  banks  in  the  stock  represent  80  per  cent,  of  its  value ; 
the  broker's,  10  per  cent.;  and  the  customer's,  10  per 
cent.  It  does  not  follow  that  every  transaction  is  ex- 
actly of  these  proportions  of  risk.  The  broker,  in  fact, 
may  be  able  to  obtain  from  the  banks  loans  large  enough 
to  enable  him,  in  connection  with  his  customer's  margin, 
to  carry  a  transaction  without  the  employment  of  much, 
if  any,  of  his  own  capital.  This  example  has  been  based 
upon  the  general  rule,  that  the  margin  demanded  by  the 
broker  of  his  customer  is  usually  10  per  cent.,  and  the 
margin  demanded  by  the  banks  of  the  broker  is  usually 
20  per  cent.,  the  percentages  in  both  cases  varying  in 
accordance  with  the  character  of  the  securities.  The  ex- 
ample serves  to  illustrate  clearly  the  close  intimacy  ex- 
isting between  the  money-market  and  the  stock-market. 
The  money-lenders  are,  in  fact,  the  actual  holders  of  the 
securities  dealt  in,  and  they  have  the  largest  interest  at 
stake  in  the  maintenance  of  values. 

Certification. — But  this  is  not  the  only  connection  be- 
tween the  banks  and  the  stock-brokers.  Let  us  return  to 
the  example  already  given.  The  broker  has  bought 
stock  for  which,  on  delivery,  he  must  pay  $550,000. 
Now,  before  he  can  get  any  loans  from  the  banks  on  this 
stock  he  must  have  the  stock  in  his  possession,  so  as  to 
be  able  to  use  it  as  collateral  for  the  loans.  Before  he 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         269 

can  get  it  in  his  possession  he  must  pay  for  it.  His  bal- 
ance in  the  bank  may  not  be  more  than  $50,000.  "What 
is  he  to  do? 

Right  here  enters  the  new  alliance  between  the  banks 
and  the  brokers.  It  goes  by  the  name  of  certification. 
The  broker,  in  the  case  instanced,  draws  a  check  for 
$550,000  in  payment  for  the  stock.  The  check  is  sent  to 
the  bank  where  the  broker  keeps  his  account  for  certifi- 
cation. The  cashier  or  paying  teller  indorses  the  check 
across  its  face,  thus  certifying  not  only  that  the  signature 
is  correct,  but  that  the  bank  will  pay  the  amount  of  the 
check  on  presentation  and  identification,  or  when  it 
comes  to  it  through  the  operations  of  the  Clearing-House. 
But  it  has  been  said  that  the  broker  has  a  balance  of 
only  $50,000,  and  here  the  bank  is  certifying  to  his  check 
for  $550,000.  That  is  what  is  called  "  overcertification, " 
and  it  is  another  form  of  a  great  system  of  credits  on 
which  the  transactions  of  Wall  Street  stand. 

Overcertification. — Overcertification  is  in  effect  a  tem- 
porary loan,  and  as  employed  in  Stock  Exchange  transac- 
tions involves  little  risk.  There  are  a  number  of  Wall 
Street  banks — not  all — that  do  a  regular  business  of 
certifying  brokers'  checks,  but  a  large  proportion  of  this 
business  is  done  by  the  trust  companies.  A  broker  en- 
ters into  a  definite  arrangement  with  one  of  the  institu- 
tions on  a  basis  something  like  this:  The  broker  agrees 
to  keep  a  daily  cash  balance  at  the  bank  of,  say,  $50,000 ; 
in  return,  the  bank  agrees  to  certify  his  checks  to  an 
amount,  say,  of  $1,000,000.  While  this  seems  startling, 
the  practice  is  in  reality  not  dangerous.  The  immediate 
cause  of  the  Seventh  National  Bank  failure  in  1901  was, 
indeed,  an  overcertification,  but  the  real  causes  were 
deeper  seated  than  that.  There  had  been  no  other 
serious  trouble  caused  by  certifications  for  brokers  in  the 
twenty  preceding  years. 


270  WORK  OF  WALL  STREET 

The  banking  institutions  are  very  conservative  in 
transactions  of  this  kind.  They  must  know  all  about  the 
broker,  his  character,  good  judgment,  and  business 
methods  and  standing.  In  other  words,  personal  char- 
acter is  a  valuable  asset  in  Wall  Street.  A  man's  credit 
in  the  Exchange  and  in  the  banks  depends  largely  upon 
it.  Then  the  bank  stipulates,  in  entering  upon  an  agree- 
ment of  this  kind  with  the  broker,  that,  while  it  will 
certify,  say,  to  an  amount  of  $1,000,000  on  a  net  daily  bal- 
ance of  $50,000,  the  broker  must  not  frequently  reach 
that  limit.  Moreover,  he  must  make  his  deposits  at  the 
bank  as  frequently  as  he  receives  checks  for  payment  for 
securities  delivered.  He  can  not  wait  until  nearly  three 
o'clock  and  then  make  one  deposit  for  the  day,  but  must 
deposit,  it  may  be,  six  or  seven  times  a  day.  The  result 
is,  that  while  the  broker  is  receiving  the  benefit  of  large 
certifications  in  excess  of  his  balance,  at  the  same  time 
he  is  at  frequent  intervals  depositing  other  certified 
checks.  Deposits  and  certifications  thus  go  on  simul- 
taneously. The  violation  of  the  National  bank  law 
against  overcertification  is  in  most  cases  more  technical 
than  actual.  Of  course,  as  soon  as  the  broker  gets  his 
stock  and  arranges  his  loan  he  is  able  make  every  cheek 
good,  and  by  his  arrangement  with  the  bank  he  is  bound 
to  maintain  his  average  daily  balance  of  $50,000,  or  what- 
ever other  amount  may  be  agreed  upon.  The  larger  the 
average  balance  the  larger  the  certification. 

The  Law. — It  has  been  said  that  the  practice  of  over- 
certification  of  brokers'  checks  is  a  technical  violation  of 
the  National  banking  law.  That  law  provides  that  it 
shall  be  unlawful  for  any  officer,  clerk,  or  agent  of  any 
National  Banking  Association  to  certify  any  check 
drawn  upon  the  association,  unless  the  person  or  com- 
pany drawing  the  check  has  on  deposit  with  the  associa- 
tion, at  the  time  such  check  is  certified,  an  amount 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         271 

of  money  equal  to  the  amount  specified  in  such  check. 

Morning  Loans. — But  even  the  appearance  of  violation 
of  law  may  be  open  to  criticism,  and  therefore  the  Na- 
tional banks  are  gradually  withdrawing  from  this  busi- 
ness, and  other  institutions  are  taking  their  place.  The 
institutions  also  are  beginning  to  adopt  other  systems, 
which  have  the  merit  of  simplicity  and  freedom  from 
possible  illegality.  Many  of  them  are  making  morning 
loans  to  brokers  of  an  amount  that  will  cover  their  proba- 
ble certification  for  the  day.  These  loans  are  based  on 
the  "single  named  paper"  of  the  broker — that  is  to  say, 
his  individual,  unindorsed  note.  With  such  a  loan  the 
broker  has  to  his  credit  a  deposit  at  the  bank  sufficient 
for  the  day's  probable  business,  and  technical  overcertifi- 
cation  is  avoided.  The  practical  result  is  the  same  under 
either  system.  The  latter  has  the  merit  of  avoiding  the 
appearance  of  evil. 

In  1911  a  leading  state  bank  adopted  still  another 
method  of  protection  in  the  certifying  of  brokers'  checks. 
This  is  in  the  form  of  a  trust  agreement  which  a  customer 
of  the  bank  who  desires  the  benefit  of  overcertification 
must  sign.  It  is  as  follows: 

We  hereby  request  the  Bank  from  time  to  time  to  certify  our 
checks  which  shall  be  payable  to  the  order  of  some  third  person, 
persons  or  corporation  in  amounts  in  excess  of  our  balance  on 
deposit  with  the  Bank  at  the  time  of  certification  in  order  that 
we  may  receive  from  the  payee  or  payees  of  said  checks  certain 
bonds,  notes,  securities,  merchandise  or  cash,  or  in  order  that  we 
may  procure  the  release  of  certain  securities  or  merchandise 
held  by  the  payee  as  collateral  to  a  loan  to  us,  and  in  considera- 
tion of  such  over-certification  by  the  Bank  of  our  checks  we 
promise  and  agree  to  hold  the  said  checks,  and  all  securities,  mer- 
chandise and  cash  received  by  us  with  the  proceeds  of  any  checks 
so  certified  as  trustee  for  the  Bank,  to  secure  the  amount  of  the 
certification  granted  by  said  bank  and  to  deliver  said  securities, 
merchandise  o^  cash  so  obtained  to  the  Bank  before  the  close  of 
business  on  the  day  of  certification  of  said  checks. 


272  WORK  OF  WALL  STREET 

Any  deficit  or  failure  resulting  from  the  non-performance  of 
this  trust  shall  constitute  an  indebtedness  of  ours  to  the  Bank, 
the  validity  of  which  is  hereby  acknowledged. 

This  agreement  shall  be  a  continuing  agreement  and  shall 
cover  every  over-certification  of  our  checks  and  the  securities  to 
be  acquired  by  the  proceeds  thereof,  and  it  shall  not  be  necessary 
to  re-execute  the  same  for  each  over-certification. 

All  the  powers  of  sale  and  transfer  of  the  property  acquired  by 
us  through  this  trust  agreement  shall  pass  to  and  become  the 
right  of  the  Bank. 

A  broker  who  has  his  checks  certified  has  necessarily 
no  other  credit  hold  on  his  bank.  A  merchant  depositing 
in  a  bank  has  the  privilege  of  having  his  paper  dis- 
counted to  a  certain  amount  proportionate  to  his  balance. 
Not  so  the  broker.  He  must  arrange  his  loan  in  a  dif- 
ferent basis. 

Concerning  the  question  of  the  certification  of  brokers* 
checks,  William  B.  Ridgely  when  Comptroller  of  the  Cur- 
rency said: 

The  payments  of  stock  delivered  under  the  rules  of  the  New 
York  Stock  Exchange  are  largely  made  by  means  of  certified 
checks.  The  certificates  are  now  made  under  forms  carefully 
prepared  by  able  lawyers  strictly  and  technically  in  conformity 
with  the  law.  Even  if  this  practice  were  altogether  stopped  it 
would  not  have  any  very  great  effect  on  the  Stock  Exchange 
transactions  and  certainly  would  not  stop  stock  gambling  and 
speculation.  It  might  cause  some  inconvenience  and  might  make 
necessary  the  delivery  of  stock  on  some  other  system,  but  such 
a  change  would  be  made  and  the  transactions  proceed,  even  of 
the  bank's  methods  of  handling  them  had  to  be  entirely  revolu- 
tionized. 

Amount  of  Certification. — The  amount  of  certification 
required  in  the  operations  of  the  stock-market  is  stu- 
pendous. On  the  deliveries  made  in  the  Stock  Clearing- 
House  transactions  the  certification  actually  required  in 
1901  was  nearly  $11,000,000,000.  The  Stock  Clearing- 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         273 

House  clears  about  85  per  cent,  of  all  the  sales  of  stocks. 
The  remaining  15  per  cent.,  as  well  as  transactions 
in  bonds,  must  therefore  be  taken  into  account  in  any 
estimate  of  total  certification  required.  The  bonds  alone 
added  at  least  another  billion,  and  it  is  safe  to  say  that 
the  business  of  the  New  York  Stock  Exchange,  exclu- 
sively, in  1901,  required  a  certification  of  $14,000,000,000, 
or  an  average  of  about  $45,000,000  a  day.  This  was  over 
one-fifth  the  average  daily  clearances  of  the  Bank  Clear- 
ing-House. 

It  may  be  asked,  What  does  a  bank  make  by  certifying 
brokers'  checks?  In  the  example  given,  the  bank  gains 
the  use  of  $50,000,  the  required  daily  balance  of  the 
broker.  But  as  the  National  bank  is,  by  law,  required 
to  keep  a  reserve  of  25  per  cent.,  its  net  gain  by  this 
operation  is  the  use  of  $37,500.  Its  profit  is  the  interest 
it  earns  by  the  loaning  of  that  amount.  If  it  were  not 
profitable  the  bank  would  not  engage  in  the  business. 

Loans  in  Exchange. — Loans  to  brokers  on  stock  and 
bond  collateral  constitute  a  large  proportion  of  the  busi- 
ness of  many  of  the  "Wall  Street  banks.  This  business  is 
carried  on  by  a  bank  in  direct  contact  with  the  stock- 
brokers and  also  through  the  agency  of  money-brokers 
who  act  as  middlemen  between  lenders  and  borrowers. 
The  bulk  of  the  loans  are  made  by  the  money-brokers, 
and  the  rate  for  call-money  is  practically  established  in 
the  Stock  Exchange.  There  is  a  regular  place  in  the 
Board-Room  for  effecting  loans,  and  certain  members 
make  this  their  exclusive  business. 

The  banker  comes  to  his  office  in  the  morning  and 
ascertains  exactly  how  his  bank  stands  after  going 
through  the  Clearing-House.  If  he  finds  he  has  a  satis- 
factory surplus  above  the  required  legal  reserve,  he  calls 
in  one  of  the  money-brokers  and  tells  him  to  lend  $500,- 
000  or  $1,000,000  or  $5,000,000,  as  the  case  may  be. 


274  WORK  OF  WALL  STREET 

Besides  the  banks,  the  private  bankers  are  large 
lenders  of  money  to  brokers.  Even  some  mercantile  con- 
cerns lend  money  on  stock  collateral.  Railroad  and  in- 
surance companies  are  at  times  large  lenders.  Russell 
Sage  for  many  years  was  a  heavy  lender  on  the  Street, 
keeping  a  considerable  share  of  his  fortune  in  cash,  for 
profitable  employment  in  this  way. 

Rates  of  Interest. — Rates  of  interest  have  fallen  greatly 
in  the  last  quarter  of  a  century.  Formerly,  brokers,  and 
merchants  as  well,  were  compelled  to  pay  as  much  as  2 
per  cent,  a  month  for  credit;  but  as  the  country  has 
grown  richer,  rates  have  declined,  and  call-money  now 
only  occasionally  goes  above  6  per  cent.,  which  is  the 
legal  rate  of  interest  in  the  state  of  New  York,  although 
loans  on  securities  at  higher  rates  are  lawful  under  sec- 
tion 379  of  the  general  business  law  which  reads : 

Sec.  379.  In  any  case  hereafter  in  which  advances  of  money 
repayable  on  demand,  to  an  amount  not  less  than  five  thousand 
dollars,  are  made  upon  warehouse  receipts,  bills  of  lading,  cer- 
tificates of  stock,  certificates  of  deposit,  bills  of  exchange,  bonds, 
or  other  negotiable  instruments  pledged  as  collateral  security 
for  such  repayment,  it  shall  be  lawful  to  receive  or  contract  to 
receive  and  collect,  as  compensation  for  making  such  advances, 
any  sum  to  be  agreed  upon  in  writing  by  the  parties  to  such 
transaction. 

It  is  a  mistaken  idea  that  the  banks  rejoice  at  a  higher 
rate  of  interest.  As  a  matter  of  fact  their  profit  is 
greater  when  the  rate  is  3  or  4  per  cent,  than  when  it  is 
25  per  cent.  For  in  the  latter  case  corporations  and 
large  individual  depositors  will  withdraw  their  money 
in  order  to  made  direct  loans  to  borrowers,  thus  deplet- 
ing the  resources  of  the  banks.  But  when  the  rate  is  3 
or  4  per  cent,  they  will  keep  their  money  in  the  banks, 
which  have  then  the  profitable  use  of  it.  Some  banking 
institutions  make  it  a  rule  never  to  make  call-loans  at 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         275 

more  than  6  per  cent.  In  times,  however,  when  a  large 
commercial  demand  for  credit  coincides  with  a  financial 
demand,  and  especially  when  there  is  a  "flurry"  in  the 
market  rates  of  call-loans  will  advance  to  high  figures. 
But  in  1911  the  rate  never  went  above  6  per  cent.,  reach- 
ing the  highest  figure  in  the  first  week  of  January  and 
the  first  week  of  December.  When  call-money  rules  at 
1,  2,  or  3  per  cent.,  it  is  said  to  be  easy;  when  it  rises 
to  6,  7,  or  8,  it  is  called  very  firm ;  and  if  it  goes  to  higher 
figures,  it  becomes  stringent. 

Call-loans  are  made  subject  to  repayment  on  demand. 
Practically,  however,  they  are  one-day  loans,  that  is,  sub- 
ject to  call  the  next  day.  A  loan  made  to-day  is  not 
called  until  to-morrow.  In  calling  loans,  banks  are  ac- 
customed to  give  ample  notice  in  writing  in  some  such 
form  as  that  shown  on  page  276  unless  the  telephone  is 
more  convenient  and  it  usually  is. 

The  whole  machinery  of  the  Street,  from  the  sale  of  a 
stock  in  the  Exchange,  its  clearance  through  the  Stock 
Clearing-House,  its  delivery  to  the  buyer,  its  deposit  with 
a  bank  as  security  for  a  loan,  is  therefore  of  the  simplest 
and  most  direct  nature.  Each  party  to  every  transaction 
obtains  the  utmost  of  protection  with  the  least  labor  and 
the  smallest  possible  amount  of  "red  tape." 

The  bank's  protection  consists  in  its  actual  holding  of 
the  collateral,  and  either  in  a  note  signed  by  the  borrower 
in  each  transaction  or  in  a  continuing  agreement,  which 
its  customer  signs,  enabling  the  bank  to  sell  the  securi- 
ties, without  notice,  in  case  the  borrower  neglects  to 
respond  to  the  call  for  payment  of  the  loan.  This  agree- 
ment, which  obviates  the  necessity  of  a  new  note  each 
time  a  new  loan  is  made,  is  generally  in  the  following 
form: 

Know  all  Men  ~by  these  Presents,  That  the  undersigned,  in  con- 
sideration of  financial  accommodations  given,  or  to  be  given,  or 


U-7-'01-500  887 

THE    THIRTIETH    NATIONAL    BANK 

Or   THE    CTTT    OW   NBW    YORK 


NEW  YORK,  Feb.  1,  1912 


S.  E.  Broker  &  Co. 


DEAR  SIRS: 


Please  send  check 


for  $100,000,  Loan  dated  Jan.  20,  1912, 
and  oblige. 

Yours  respectfully, 

WILFRED  HOKE, 


Cashitr. 


FORM  USED  IN  CALLING  LOAN 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         277 

continued  to  the  undersigned  by  THE  THIRTIETH  NATIONAL  BANK 
OF  THE  CITY  OF  NEW  YOBK,  hereby  agree  with  the  said  Bank 
that  whenever  the  undersigned  shall  become  or  remain,  directly 
or  contingently,  indebted  to  the  said  Bank  for  money  lent,  or  for 
money  paid  for  the  use  or  account  of  the  undersigned,  or  for  any 
overdraft  or  upon  any  indorsement,  draft,  guarantee  or  in  any 
other  manner  whatsoever,  or  upon  any  other  claim,  the  said  Bank 
shall  then  and  thereafter  have  the  following  rights,  in  addition 
to  those  created  by  the  circumstances  from  which  such  indebted- 
ness may  arise  against  the  undersigned,  or  his,  or  their  executors, 
administrators  or  assigns,  namely : 

1.  All  securities  deposited  by  the  undersigned  with  said  Bank, 
as  collateral  to  any  such  loan  or  indebtedness  of  the  undersigned 
to  said  Bank,  shall  also  be  held  by  said  Bank  as  security  for 
any  other   liability   of   the   undersigned  to   said   Bank,    whether 
then  existing  or  thereafter  contracted ;  and  said  Bank  shall  also 
have  a  lien  upon  any  balance  of  the  deposit  account  of  the  un- 
dersigned with  said  Bank  existing  from  time  to  time,  and  upon 
all   property  of  the  undersigned  of  every  description   left  with 
said  Bank  for  safe  keeping  or  otherwise,  or  coming  to  the  hands 
of  said  Bank  in  any  way,  as  security  for  any  liability  of  the  un- 
dersigned to  said  Bank  now  existing  or  hereafter  contracted. 

2.  Said  Bank  shall  at  all  times  have  the  right  to  require  from 
the  undersigned  that  there  shall  be  lodged  with  said  Bank  as 
security   for   all   existing   liabilites   of   the   undersigned  to   said 
Bank,   approved  collateral   securities   to  an  amount  satisfactory 
to  said  Bank ;   and  upon  the  failure  of  the  undersigned  at  all 
times  to  keep  a  margin  of  securities  with  said  Bank  for  such  lia- 
bilities of  the  undersigned,  satisfactory  to  said  Bank,   or  upon 
any  failure  in  business  or  making  of  an  insolvent  assignment  by 
the  undersigned,  then  and  in  either  event  all   liabilities  of  the 
undersigned,  to  said  Bank,  shall  at  the  option  of  said  Bank  be- 
come immediately  due  and  payable,  notwithstanding  any   credit 
or  time  allowed  to  the  undersigned  by  any  instrument  evidenc- 
ing any  of  the  said  liabilities. 

3.  Upon  the  failure  of  the  undersigned  either  to  pay  any  in- 
debtedness to   said   Bank    when   becoming   or   made   due,   or   to 
keep  up  the  margin  of  collateral  securities  above  provided  for, 
then  and  in  either  event  said  Bank  may  immediately  without  ad- 
vertisement, and  without  notice  to  the  undersigned,  sell  any  of  the 
securities  held  by  it  as  against  any  or  all  of  the  liabilities  of  the 


WORK  OF  WALL  STREET 

undersigned,  at  private  sale  or  Brokers'  Board  or  otherwise,  and 
apply  the  proceeds  of  such  sale  as  far  as  needed  toward  the 
payment  of  any  or  all  of  such  liabilities,  together  with  interest 
and  expenses  of  sale,  holding  the  undersigned  responsible  for  any 
deficiency  remaining  unpaid  after  such  application.  If  any  such 
sale  be  at  Brokers'  Board  or  at  public  auction,  said  Bank  may 
itself  be  a  purchaser  at  such  sale  free  from  any  right  or  equity 
of  redemption  of  the  undersigned,  such  right  and  equity  being 
hereby  expressly  waived  and  released.  Upon  default  as  afore- 
said, said  Bank  may  also  apply  toward  the  payment  of  the  said 
liabilities  all  balances  of  any  deposit  account  of  the  undersigned 
with  said  Bank  then  existing. 

It  is  further  agreed  that  these  presents  constitute  a  continuing 
agreement,  applying  to  any  and  all  future  as  well  as  to  existing 
transactions  between  the  undersigned  and  said  Bank. 


Dated,  New  York,  the day  of 19 

Time-Loans. — Most  brokers  seek  to  secure  a  certain 
proportion  of  their  required  line  of  credit  on  time.  Thus 
time-loans  are  made.  These  are  loans  based  on  stock  and 
bond  collateral,  but  are  not  subject  to  call  until  the 
expiration  of  a  certain  specified  number  of  days,  when 
they  must  be  paid  or  renewed.  Formerly,  time-loans 
were  made  by  months,  but  now  by  days.  Thus  there  are 
thirty-day,  sixty-day,  and  ninety-day  loans.  The  rates 
for  time-loans  are  generally  higher  than  for  call,  except 
in  times  of  severe  stringency  in  the  money-market,  and 
banks  are  commonly  very  conservative  in  making  such 
loans  for  long  periods.  The  bank's  deposits  being  sub- 
ject to  withdrawal  on  demand,  it  follows  that  it  can  lock 
up  only  a  comparatively  small  part  of  its  resources  in  the 
form  of  time-loans.  The  stock-broker,  though  paying 
more  for  his  credit  than  he  would  on  the  call-loan  basis, 
escapes  the  liability  of  having  all  his  loans  called  at 
one  time. 

A  blank  for  the  recording  of  the  details  of  a  time  loan 
is  shown  on  page  279. 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         279 
During  the  last  ten  years  more  and  more  dependence 


jo-  10-11  -soo 

TIME    LOAN. 
*     

1602 

•Phone 

No  
Page  Date  

191     Due_. 

'<) 

i     Rate. 

INTEREST    CHARGED 

INTEREST    PAID 

MO. 

AMOUNT 

MO. 

AMOUNT 

DATE 

CREDIT  TO 
INT.  ACCRUED 

CREDIT  TO 
INTEREST 

PAID 

TO 

JAN. 

JULY 

FEB. 

AUG. 

MAR. 

SEPT. 

APR. 

OCT. 

MAY 

NOV. 

JUNE 

DEC. 

ORIGINAL 

SUB. 

c  o 

L  L  A  T  E  R  A 

tf 

PRICE 

VALUE 

RECEIVED  ALL  COLLATERAL  TO  THE  ABOVE  MENTIONED  I  OAK 

NEW  Y< 

—  191 

P 

FORM  OF  RECORDING  TIME  LOAN 

upon  the  telephone  in  call-loan  transactions  has  been  the 
rule  in  the  money-market,  it  being  much  more  easy, 
quick  and  satisfactory  for  both  lender  and  borrower  to 


20 


-2s,,  WORK  OF  WALL  STREET 

make  their  arrangements  in  this  way,  both  for  entering 
into  and  terminating  loans.  No  loans  can  be  called  or 
paid  after  1  P.  M.  unless  notice  has  been  given  before 
that  time,  and  the  broker  has  some  time  allowed  him 
in  which  to  make  other  arrangements  for  necessary 
credit. 

The  method  of  making  call-loans  has  always  been  ex- 
ceedingly easy,  and  the  changes  made  during  recent 
years  have  been  mostly  to  make  the  process  more  simple 
and  yet  secure  protection  to  both  parties.  If  the  bank 
agrees  to  make  a  loan  and  the  broker  accepts  the  rate 
offered,  the  latter  present  his  securities  as  collateral  in  a 
large  envelope  marked  upon  its  face  with  all  particulars 
of  the  loan,  as  shown  on  page  281.  Unless  a  collateral 
agreement  is  on  file  at  the  bank  where  the  loan  is  made 
the  broker  signs  a  note  on  a  form  like  that  on  page  282. 

The  rate  in  the  above  sample  loan  is  given  at  7£  per 
cent,  simply  to  indicate  that  call-money  may  be  legally 
loaned  at  a  rate  above  6  per  cent.  As  has  already  been 
said  the  rate  rarely  rises  above  the  6  per  cent,  point,  and 
the  7^  was  not  the  ruling  rate  at  the  date  given. 

The  bank  puts  the  envelope  of  securities  received  from 
the  borrower  and  all  papers  in  connection  with  the  loan 
which  are  not  to  be  returned  to  the  borrower  when  loan 
is  paid,  into  another  and  larger  envelope  like  that  on 
page  283. 

By  adding  the  loan  card  (see  page  284)  with  messen- 
ger's receipt  for  collateral,  the  outside  envelope  is  then 
complete  and  ready  for  filing. 

The  sample  transaction  here  illustrated  is  as  follows: 
The  Thirtieth  National  Bank  loans  to  S.  E.  Broker  &  Co. 
$100,000  on  demand  at  1\  per  cent,  interest,  the  broker 
securing  the  loan  with  stocks  whose  market  price  is 
$123,100.  With  this  collateral  he  gives  his  note  in  which 
the  bank  is  authorized,  upon  non-payment  of  the  loan 


DEMAND    LOAN 

TO 

S.L.BROKER   &CO. 
Br 


AMOUNT^  /OP. OOP,-        RATE   .j'A 
£>ATE_FB_M9J2___ 


SECURITIES 


loo 
loo 
loo 
Zoo 
3oo 
loo 
loo 
loo 

loo 


8 


I/ 


121 


(,0 


ooc 
lo  5- 


7 
12 

13 

13 


/Z3 


foo 


RECORD  OF  DEMAND  LOAN 


282  WORK  OF  WALL  STREET 

when  due,  to  sell  the  securities  either  at  public  or  private 
sale;  and  the  borrower  also  gives  to  the  bank  a  lien  for 
the  amount  of  the  note  upon  the  title  or  interest  of  the 
borrower  in  any  other  property  or  securities  in  the  keep- 
ing of  the  bank,  and  also  upon  the  balance  of  the  deposit 
account  of  the  borrower  in  the  bank. 


l/Oo.ooo-  „  New    York  __  FE.B.J...I9J2  _  igi 

On  DIM  AMD,  for  value  received.  Ihe  uodcr&i£nc<i  promiM      to  pay  t 

THETHIRT1ETH  NATIONAL  BANK  OF  THE  CITY  OF  NEW  YORK, 

"•  O«ou.  «  n>  bwk.ot  oftci  in  New  Voik  City,  in  luod»  current  •!  I  be  No  York  Clurinf  H<xue.  with  mmnl  Iron  Ibe  Ail 
Ihe   nle  ol       "    'It,  pei  cent     fa   uuiin   (p»>>bte   oxmblr   on   Id*   Six   d.y   ol    «cb   BOMb). 


Ddkri. 


bmof  aepouled  Mb  Ibe  i«d  !U*k  •>  colktenj  lecomy  lor  Ibe  poiaeot  o(  Ihi.  Me  aod  o(  «ny  Mbn  lubilily  OT  luMiln  ol  tbe 
••J»r>n««)  lo  Ibe  u«l  Bulk   doe  ot  to  becooe  doe.  ud  of  ray  lubilily  bemfter  cottrtned  or  »iu»|.  Ibe  following  property. 


W  iW  mt»«wd  nwkH  vmlue  d  $V  *2  ^  /^O  —  .  Ihc  undrmitiKd  alw  htreby  CIVI^C  *o  the  Mid  Bank  *  two  lor  the  amount  of 
•tt  the  •  torn i ill  tubdnwA  upoe  ibr  title  of  ititerai  o(  ibe  oudcragnrd  m  any  other  property  or  Mcuritie*  it  any  tin*  f iveo  onto,  or 
Ml  >•  or  in  any  w»\  can*  into  ibe  poMcwwa  or  custody  ol  tbc  said  &inL  for  Mir  keeping  or  otben»i«e.  and  «l*o  upon  ibe  balance 
of  ibe  deport  Ktonot  ol  toe  UMderai(Md  »ub  the  mti  Bank  emiainc  from  note  to  tine 

U  cnr  Ibv  Mcunlmat  My  twc  pledged  lor  uy  of  tbr  iforeMid  Iiabtlittn  should  decline  in  market  value,  tbc  uodervcned 
acne  .  witbnvt  oottcvur  demand.  todrpOMt  lorihwitb  with  Ibeuid  Dank  additional  *ectmties  toit»Mtislactioo.  and  10  case  of  failure 
10  do  K>  tbn  Mlc  tad  all  «b*r  Inbditm  of  tbe  woderMicocd  to  the  va»d  Bank  shall  at  ooce  bnoeie  doe  an<!  payable  without  demand 
of  par****  tbereol.  and  tbe  ttri  Buk  may  icamediatcly  tell  and  apply  tbe  Mid  Kcuntm  in  manner  and  with  Ibe  effect  hereinafter 


Tbe  ondemcoed  affrec  that  la  tbe  rveM  of  tbe  totolvency  of  tbe  ooderMgord  or  of  any  guarantor  or  inuonet  ol  tbisaote  all 
ibe  aforewid  babUitie*  M«ll.  at  ibe  opltoa  of  tbe  ^M!  Buk.  become  immediately  doe  witboui  dcvund  of  pavnrai  thereof 

Tbe  Mid  Bank  •  berefay  aytbocued.  upon  tbe  BOO  payment  of  any  of  tbe  *atd  liabilrurk  *bm  dor  or  made  due.  to  wll  a»ugn 
aad  d*li«ct  tbr  wbote  ot  ibe  sa*d  McanlM*.  or  any  part  loereof  or  any  wbatilutcs  iberelor  or  additioatitMrreto.  ur  any  other  MY  unites 
or  prODrrty  of  tbe  naderMgoed.  or  im  wbwb  tbe  undemgord  ha  any  rtgb>  or  lolrreftt.  givco  unlu.  or  Ht  m  or  in  any  way  come  into 
tbe  pnaii  mum  or  nulody  of.  tbc  ta*d  Bank,  at  any  Sxcbaage  or  at  public  or  private  **le  ntnet  for  caab  01  on  credit  or  for 
fntarc  dc4rvery  M  ibe  optma  of  ibe  md  Bank,  wiiboot  eiibci  advertiarttwat  or  notice,  which  arr  brtefay  expressly  waived  II  inch 
•cvntw*  or  property  arc  x>  told  at  any  Excbaoge  or  at  public  Mk  tbc  Mid  Bank  may  *Uelf  pu>cna^  ibe  *  buie  or  any  part  thereof 
lr«  Iroai  uy  ngbt  of  rcdrmptioa  on  tbc  pan  of  ibe  noderMgned .  Ibe  MOW  being  hereby  waived  aod  rrlraMd 

ID  CMC  of  wle  mad*  l«  any  caa»e.  alter  deducting  all  cotti  or  cxpcii*e«  of  collection.  Mk  or  dvluery .  tbe  sa>d  Bank  m*y 
apply  Ibe  rcMdnc  of  ibe  proceed*  to  pay  ettber  one  or  more  ol  all  tbr  aforcMid  liabtlitic*  whcibrr  then  due  ot  Dot  u  it  aball 
dWtn  proper  making  proper  rebate  for  interest  on  liabiliUe*  not  tben  due  aod  retutoiog  tbe  overplus  il  ao>  to  the  uodemgncd.  tbc 
•adentgaed  agreeing  to  be  and  remain  liable  to  tbe  said  Bank  lor  any  deficiency  « ruing  upon  sucb  sale  or  ulca. 


NOTE  GIVEN  BY  BROKER 

The  bank  has  a  card  system  of  its  own  by  which  it 
records  the  various  transactions  with  each  customer,  as 
for  instance  that  shown  on  page  285.  This  enables  the 
bank  to  see  at  a  glance  the  total  amount  of  the  accom- 
modation given  to  each  borrower. 

Substitutions. — It    frequently    happens    that    the    bor- 


THE  THIRTIETH   NATIONAL   BANK 

Or  THE  CITY  OF  NEW  YORK 


Due. 


191- 


AMOUNT   LOANED  AMOUNT   PAID 


$        /PC 


COLLATERALS 


THE  BANK'S  ENVELOPE 


Loan  N.//^/:                 JhfThirtielh  National  Bank 
Denmnd  Loan  of  9/O£l,  COO^L 


COLLATERALS  Price  Value 


^2£ 


^2 


/J 


Snosd**^ 


If 


-7*1 


MAR  2i   19 


t&tdn/irt 


THE  LOAN  CARD 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS 


285 


rower  wishes  to  substitute  one  stock  for  another  in  the 
collateral  for  the  loan,  and  the  bank  will  accommodate 
him  provided  the  security  for  the  loan  is  not  materially 
weakened.  For  the  broker  in  the  course  of  his  business 
may  be  required  to  sell  one  of  the  stocks  and  make  de- 
livery. For  instance  in  the  loan  indicated  the  firm 
desires  to  substitute  new  stocks  for  others  to  be  with- 
drawn, and  he  therefore  sends  to  the  bank  a  letter  like 
that  on  page  286. 


/U-Q  i 


A?/? 


a/g  ffC  Q 


/PC  coo 


£2- 


/CO 


&, 


/CO 


THE  BANK'S  LOAN  CARD 

In  this  case  100  shares  of  Atchison  and  100  shares  of 
Chesapeake  and  Ohio  are  withdrawn  and  300  Iowa  Cen- 
tral preferred  and  100  American  preferred  are  substi- 
tuted. By  this  substitution  the  security  will  be  shown 
upon  analysis  to  have  been  somewhat  reduced  in  quality. 
The  original  loan  was  on  a  16  point  basis  (therefore  less 
than  the,  technical  20  per  cent,  basis).  The  new  loan  is 
on  a  13.7  per  cent,  basis.  Comparison  of  the  average 


S.E.. 

79 


MEW 


T    Co.. 


F£B   7    1912 


MErM  : 


THE 
To      OUR      LOAN       OF    $  loo. OOP.     DATED 

PLEASE    DELIVER    TO 


/OO 


INS     E)CCHAMQE 


loo 


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TRuuf 


REQUEST  FOR  SUBSTITUTION 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         287 

price  as  between  the  original  loan  and  the  loan  with  sub- 
stituted stocks  shows  that  the  1450  shares  in  the  former 
valued  at  $123,100  would  average  85,  while  the  1650 
shares  in  the  substituted  collateral  valued  at  $122,700 
averaged  74.  In  the  original  loan  one-half  of  the  securi- 
ties were  railroads  which  are  usually  preferred.  In  the 
substituted  loans  the  railroads  fell  below  that  amount. 
The  substitution  slip  is  filed  in  the  bank's  big  loan 
envelope. 

Frequently  there  are  several  substitutions  in  one  day 
and  in  the  stock  panic  of  May  9,  1910,  there  were  eleven 
substitutions  in  one  loan. 

Scrutinizing  Collateral. — In  making  loans  the  bank 
scrutinizes  the  collateral  closely.  The  securities  must  be 
strictly  good  delivery  according  to  the  rules  of  the  Ex- 
change. Stocks  and  bonds  for  which  there  is  not  a 
constant  market  are  generally  not  acceptable.  The  most 
approved  collateral,  as  has  been  indicated,  are  the  stocks 
and  bonds  of  standard  railroad  companies,  listed  at  the 
Exchange  and  having  a  high  standing.  There  are  also 
industrial  companies  whose  stocks  are  equally  acceptable 
as  loan  collateral.  But,  as  a  rule,  most  banks  discrimi- 
nate against  industrials  to  this  extent,  that  they  will  gen- 
erally make  no  loan  on  industrial  collateral  alone,  or  if 
they  do,  they  charge  a  much  higher  rate  of  interest. 
When  industrial  stocks  are  accepted  it  is  generally  re- 
quired that  there  must  be  railroad  or  other  approved 
securities  with  them.  It  is  needless  to  say  that  Govern- 
ment bonds  always  rank  as  the  very  highest  class  of  col- 
lateral, and  the  banks  require  no  margin  on  such  security. 
If  the  market  value  of  the  securities  deposited  for  a  loan 
declines,  the  banks  are  obliged  to  call  for  more  collateral 
in  order  to  keep  the  required  margin  good. 

Change  in  Rate. — The  bank  is  frequently  obliged  to 
mark  up  the  rate  for  the  call  loan.  Changes  in  the  rate, 


C-U-'Ol-lM  1511 

TliJfcC    THIRTIETH    ISTATIOISTAXi    BANK 

Or  TEtB    CITTT    Of   NKW    YORK 


NEW  YORK,  F«6.  2, 
Co., 


DEAR  SIRS: 

If  agreeable,  we  mark  your  loan 

.0.^  dated  .?*:  I*..!?.!*:.... 

f  dated 

__  dated 

as  renewed  at    6     per  cent,  from  this  date. 

Please    confirm    our    action    by    stamping    perforated    slip, 
which  kindly  return  to  us. 

Yours  respectfully, 

WILFRED  HONE, 

Cashier. 

We   mark  rate  ot  interest  on  your   Loan     6     per  cent,  from 
this  date. 


per 

Date  Feb:J,_1912: 

NOTICE  OF  CHANGE  IN  RATE  OF  INTEREST 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         289 

whether  up  or  down,  are  usually  made  over  the  'phone, 
but  if  it  is  advisable  to  secure  confirmation  the  form  on 
page  288  may  be  used,  and  in  this  illustration  a  reduction 
of  the  rate  is  noted. 

Legality. — It  has  been  said  that  when  a  broker  pledges 
as  collateral  for  a  bank  loan  the  securities  which  he  has 
bought  for  a  customer,  and  which  the  broker  holds  as 
security  for  a  loan  made  to  the  customer,  that  is  rehy- 
pothecation.  But  this  is  the  universal  practice  of  the 
Street,  to  which  every  operator  in  stocks  tacitly  agrees. 
The  illegality  of  the  operation  can  be  avoided  by  an 
agreement  between  brokers  and  customers.  The  law  on 
this  subject  was  expounded  a  few  years  ago  by  Justice 
Williams  in  the  Appellate  Division  of  the  New  York  Su- 
preme Court.  He  held  practically  that  when  securities 
carried  on  margin  for  a  customer  were  pledged  with 
other  securities  for  loan  for  a  greater  amount  than  the 
indebtedness  of  the  customer  on  account  of  the  purchase 
of  securities,  and  without  the  broker  retaining  in  his  pos- 
session other  securities  of  a  like  kind  and  amount,  that 
was  conversion  by  the  broker  of  the  customer's  property. 
Hence  the  necessity  for  an  understanding  between  bro- 
kers and  customers  on  this  subject.  If  a  customer  will 
not  agree  to  this  absolutely  necessary  use  of  his  securi- 
ties, he  might  as  well  keep  out  of  the  stock-market. 

As  was  shown  in  a  preceding  chapter  the  loans  se- 
cured by  stocks  and  bonds  amount  to  fully  one-third  of 
the  total  outstanding  credits  in  the  United  States. 
Whether  this  constitutes  the  most  useful  form  of  credit 
is  a  matter  of  some  dispute,  but  the  security  loan  is  un- 
doubtedly, taking  everything  into  consideration,  the  safest 
form  of  credit.  Its  advantages  are: 

Advantages  of  Security  Loan. — The  ease  by  which 
securities  can  be  made  the  basis  of  loans,  the  mere 
taking  of  an  envelope  containing  the  collateral  to  the 


•_>r>o  WORK  OF  WALL  STREET 

lender,  after  an  arrangement  made  over  the  'phone  as 
to  amount  of  principal  and  rate  of  interest,  being  all 
that  is  needful;  while  in  the  case  of  default  there  is  a 
market  at  hand  in  which  the  securities  may  be  sold  by 
the  lender  to  realize  the  principal  of  the  loan. 

Its  chief  defect  is  that  the  security  loan  largely  elimi- 
nates the  element  of  character  from  the  contract  entered 
into.  The  personal  standing  of  the  borrower  is  far  less  a 
factor  than  the  market  price  of  the  securities  he  offers  as 
collateral. 

Three  Classes  of  Credit. — There  are  three  main  classes 
of  credit: 

1.  That  based  upon  the  personal  and  business  stand- 
ing of  the  borrower;  2.  That  based  upon  actual  com- 
modities such  as  cotton,  grain,  coffee,  and  the  like,  or 
on  warehouse  receipts  or  bills  of  lading  representing 
the  same ;  3.  That  based  upon  stocks  and  bonds. 

Each  has  its  peculiar  merits  and  demerits.  The  first 
two  have  a  more  direct  relation  to  the  movement  of 
commerce  than  the  security  loan,  and  yet  the  latter,  like 
the  two  others,  has  its  proper  place  in  the  credit  market 
and  performs  a  useful  function. 

Loans  based  upon  personal  or  firm  credit  require  the 
elaborate  machinery  of  the  modern  credit  department 
with  all  its  facilities  for  ascertaining  every  essential  fact 
regarding  the  borrower  and  his  business.  But  the  regu- 
lations imposed  by  the  lenders  have  the  inestimable 
benefit  of  enforcing  higher  personal  and  financial  habits ; 
and  no  more  useful  contribution  has  been  made  to  bank 
credits  in  recent  years  than  the  rule  requiring  borrowers 
to  make  and  sign  statements  regarding  their  business 
which  are  minute  and  searching  in  the  information  which 
they  exact.  Loans  on  commodities  and  merchandise  are 
subject  to  peculiar  difficulties  and  perils,  but  are  funda- 
mental "to  the  commercial  supremacy  of  the  country, 


CREDIT  IN  STOCK  EXCHANGE  TRANSACTIONS         291 

and  handled  with  intelligence  and  proper  care,  can  be 
made  eminently  safe."* 

REFERENCES 

Those  interested  in  this  branch  of  the  subject  may  consult  Dr. 
Jacob  H.  Hollander's  "Bank  Loans  and  Stock  Exchange  Specu- 
lation," a  pamphlet  issued  by  the  National  Monetary  Commission, 
1911. 

'•''Journal  of   American   Bankers'  Association,    February,    1912. 


CHAPTER  XX 

• 

THE  BANK  STATEMENT  AND  THE  MOVEMENT  OF  MONEY 

"The  interesting  evolution  of  means  of  exchange 
which  we  are  witnessing  and  which  is  familiar  to  every- 
body seems  to  be  leading  us,  after  the  well-defined 
periods  of  barter  and  money,  to  a  system  of  mere  clear- 
ing of  balances.  All  exchange  operations  would  then  be 
settled  by  simple  book  transfers.  Coin,  thus  reduced  to 
the  condition  of  money  on  account,  would  cease  to  play 
any  real  part.  Economists  are  even  thinking  of  a  return 
to  barter,  which  would  complete  the  cycle,  bringing  us 
back  to  the  original  state  after  thousands  of  years  and 
combinations  of  all  kinds.  Such  would  be  the  course  of 
this  evolution." — Maurice  Patron. 

The  important  changes  in  the  bank  statement  make  it 
a  more  complete  exhibit  than  ever  of  the  banking  con- 
ditions of  New  York.  Even  the  weekly  statement  of  the 
Bank  of  England  scarcely  exercises  a  more  potent  influ- 
ence on  the  money-markets  of  the  world  than  does  the 
weekly  statement  of  the  New  York  Bank  Clearing-House. 

The  movement  of  money  in  and  out  of  the  banking 
institutions,  and  the  volume  of  their  deposits  and  loans, 
are  closely  watched,  not  only  by  every  stock-broker  and 
stock  operator,  but  by  every  man  of  large  affairs  who  is 
dependent  upon  the  stability  of  credit  for  the  security 
of  his  business,  and  upon  the  rate  of  money,  to  determine 
whether  he  has  a  margin  of  profit  or  not. 

All  lines  of  business  are  sensitive  to  changes  in  the 
money  rate,  but  the  stock-market  is  peculiarly  so  on  ac- 

292 


BANK  STATEMENT  AND  MOVEMENT  OF  MONEY        293 

count  of  its  intense  mobility.  It  is  true  that  sometimes 
the  stock-market  asserts  its  independence  and  advances 
in  spite  of  high  rates  for  loans,  but,  as  a  general  rule, 
any  shortage  in  the  supply  of  credit  checks  stock  specu- 
lation and  produces  declines  in  prices.  Any  sudden  or 
severe  contraction  of  credits  will  produce  a  " flurry"  in 
the  market — that  is,  a  sharp  break  in  prices,  attended 
with  more  or  less  excitement.  If  the  contraction  is  so 
extreme  as  to  make  it  impossible  to  arrange  loans,  large 
blocks  of  securities,  which  can  not  be  carried,  are 
dumped  on  the  market  for  what  they  will  bring,  and  the 
Street  then  has  a  panic.  Wall  Street  therefore  scru- 
tinizes the  bank  statement  with  the  utmost  care. 

This  statement  is  issued  by  the  Clearing-House  once  a 
week,  on  Saturday,  at  noon.  If  Saturday  is  a  holiday, 
it  is  issued  on  Friday,  at  three  o'clock.  It  gives  the  con- 
dition of  all  the  member-banks  at  that  time,  their  loans, 
their  net  deposits,  their  cash  holdings,  and  their  circu- 
lation. 

Averages. — Formerly  the  statement  presented  only  an 
exhibit  of  the  average  conditions  of  the  banks,  but  now 
to  this  exhibit  of  averages  is  added  a  statement  of  actual 
conditions  on  the  day  of  the  issue.  The  actual  figures 
are,  however,  only  for  the  condition  of  the  banks  as  a 
whole ;  the  exhibit  for  each  individual  bank  is  on  a  sys- 
tem of  averages.  For  instance,  the  bank  ascertains  what 
its  outstanding  loans  were  on  each  day  of  the  week,  and 
reports  the  average  of  these  items  for  the  week  to  the 
Clearing-House.  It  does  the  same  with  its  deposits  and 
cash  holdings.  The  average  for  the  week  may  be  quite 
different  than  the  actual  figures  for  the  last  day  of  the 
week.  The  banks'  actual  condition  might  be  better  or 
worse.  It  follows  that  if  a  large  amount  of  currency 
should  be  received  on  Friday,  it  would  count  only  for 
one  day  in  the  week's  average  of  cash  holdings,  and  the' 


294  WORK  OF  WALL  STREET 

actual  condition  of  the  bank  on  Saturday  would  be  better 
than  the  average  statement  indicated.  If  there  had  been 
a  large  withdrawal  of  gold  on  Friday,  for  export,  the 
loss  would  count  only  for  one  day  in  the  week's  average, 
which  would  make  the  statement  appear  better  than 
actual  conditions.  A  striking  illustration  of  the  effect 
of  the  law  of  averages  upon  the  bank  statement  was 
given  in  September,  1902.  The  statement  of  September 
20  reported  a  loss  in  cash  of  $7,300,000,  while  the  actual 
loss,  so  far  as  it  could  be  estimated,  was  only  $3,600,000. 
The  statement  of  September  27,  on  the  other  hand,  re- 
ported a  gain  in  cash  of  $1,790,000,  while  the  apparent 
loss  was  $4,000,000.  The  former  statement  reported  a 
deficit  in  reserves ;  the  latter  a  surplus. 

The  system  of  averages  has  the  advantage  that  it 
removes  at  once  the  temptation  and  the  possibility  of 
"window  dressing."*  If  a  bank  reports  its  actual  con- 
dition on  a  given  day  it  might  take  pains  to  make  the 
showing  better  than  the  actual  facts  warrant,  as,  for  in- 
stance, by  borrowing  money  to  innate  its  exhibit  of 
reserves.  This  is  what  is  called  "window  dressing," 
that  is  to  say  putting  more  attractive  goods  in  the  win- 
dow than  are  on  the  shelves  for  sale.  But  while  the 
average  system  possesses  this  advantage,  it  has  the  im- 
portant disadvantage,  that  though  it  is  a  fair  statement 
for  a  week,  it  is  often  an  erroneous  statement  for  the  day 
it  is  issued.  The  Clearing-House  therefore  has  changed 
the  form  of  its  weekly  statement,  by  publishing  the  aver- 
age figures  for  the  week  of  each  "individual"  bank,  and 

*  "The  expression  'window  dressing'  in  its  application  to  finan- 
cial institutions  had  its  origin  in  Great  Britain.  It  arose  out  of 
the  fact  that  the  joint-stock  banks  were  not  accustomed  to  keep 
cash  reserves  of  any  considerable  size,  but  made  it  a  practice  when 
it  came  time  to  render  a  public  return  to  temporarily  augment 
their  cash  with  a  view  to  making  it  appear  that  they  habitually 
carried  considerable  reserve." — From  the  Commercial  and  Finan- 
cial Chronicle,  Jan.  27,  1912. 


BANK  STATEMENT  AND  MOVEMENT  OF  MONEY        295 

adding  thereto  the  actual  figures  for  "all"  the  banks  on 
the  day  of  issue.  In  this  way  it  secures  the  advantages 
of  both  systems  of  reporting  conditions. 

Watching  for  Statement. — At  noon  on  Saturday  every 
Wall  Street  man  watches  the  tape  for  the  report  from 
the  Clearing-House.  What  he  gets  at  first  is  a  mere 
summary  of  the  statement,  and  an  account  of  the  gains 
and  losses  as  compared  with  the  following  week.  For 
example,  taking  the  statement  of  January  13,  1912,  the 
first  announcement  was  that  the  surplus  reserve  had  in- 
creased $5,332,600;  loans  had  increased  $39,982,000; 
specie  had  increased  $14,438,000;  legal  tenders  had  in- 
creased $3,035,000 ;  net  deposits  had  increased  $46,298,000 
and  circulation  had  decreased  $150,000. 

This,  for  the  time  being,  is  sufficient  for  the  Street. 
But  the  banker  and  broker  and  merchant  will  desire, 
especially  in  critical  periods,  to  know  more  of  the  situ- 
ation, and  so  will  study  the  detailed  statement,  which  is 
given  out  soon  after  the  summary,  but  which  is  not  sent 
over  the  tape.  The  detailed  statement  gives  the  con- 
dition of  each  bank,  but  requires  analysis  for  a  complete 
understanding. 

The  following  is  the  statement  of  averages  issued  on 
Saturday,  January  13,  1912,  and  it  has  a  certain  historic 
interest,  because  it  was  compiled  in,  and  issued  from, 
the  Chamber  of  Commerce  during  the  week  that  the 
Clearing-House  was  its  guest. 

The  column  showing  circulation  is  omitted,  and  another 
column  is  added,  showing  by  percentages  whether  the 
bank  is  above  or  below  its  legal'  reserve.  The  banks  are 
required  to  hold  25  per  cent,  of  their  deposits  as  reserve 
in  their  own  vaults.  The  trust  companies  are  also  re- 
quired to  hold  25  per  cent,  reserves,  but  only  15  per  cent, 
need  be  cash  in  their  own  vaults,  the  remainder  being 
carried  on  deposit  in  member  banks. 
21 


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BANK  STATEMENT  AND  MOVEMENT  OF  MONEY        299 

Analyzing  the  Statement. — To  read  the  bank  statement 
intelligently  one  must  study  it,  first  as  a  whole,  and  sec- 
ond in  its  various  parts.  In  the  statement  given  it  ap- 
pears that  while  there  was  a  large  expansion  in  credits 
during  the  week,  amounting  to  nearly  $40,000,000,  there 
was  at  the  same  time,  a  notable  increase  in  cash  reserves, 
so  that  in  spite  of  the  expansion  in  loans,  the  institutions 
held  $29,058,250  more  reserve  than  was  actually  needed, 
an  increase  of  $5,332,600  during  the  week.  Thus  they 
had  on  hand  the  ability  for  a  further  big  increase  in 
credits. 

The  Reserves. — But  the  student  of  the  bank  statement 
will  also  examine  it  to  ascertain  the  condition  of  each  of 
the  big  banks,  to  learn  which  of  them  have  increased  or 
reduced  their  loans,  which  have  gained  or  lost  in  cash, 
and  which  are  above  or  below  their  legal  reserves.  To 
ascertain  the  legal  reserve  of  a  National  bank,  divide  its 
deposits  by  four,  and  the  difference  between  this  and  its 
specie  and  legal  tenders  added  together  shows  whether 
it  is  above  or  below  the  legal  requirement.  The  state- 
ment of  January  13th  showed  that  the  National  City  Bank 
reserves  amounted  to  25.5-  per  cent,  of  their  deposits,  the 
NationalBank  of  Commerce  30.2,  the  First  National  25, 
the  National  Park  26.7,  the  Chase  National  26.2,  the  Han- 
over National  29.1  and  the  Fourth  National  26.9.  The 
requirement  for  each  of  these  banks  is  25  per  cent.  Such 
an  examination  as  this  reveals  the  ability  of  each  of  the 
institutions  for  further  expansion  of  loans. 

Important  Items. — The  four  most  important  items  in 
the  bank  statement  are : 

1.  The  cash  holdings  which  are  ascertained  by  adding 
the  specie  and  legal  tenders.    The  cash  holdings  consti- 
tute the  reserves  of  the  banks. 

2.  The  surplus  reserve  which  is  the  excess  held  above 
the  amount  of  cash  required  by  law. 


300  WORK  OF  WALL  STREET 

3.  The  outstanding  loans. 

4.  The  net  deposits,  which  are  the  gross  deposits  (not 
counting  the  deposits  of  the  United  States  Government, 
but  adding  the  unpaid   dividends)    less   exchanges   for 
the  Clearing-House,  amounts  due  from  other  banks  for 
collection,  notes  of  other  banks  and  checks  on  non-clear- 
ing institutions  in  this  city. 

Every  National  bank  is  required  by  law  to  hold  specie 
and  legal  tenders  amounting  to  at  least  25  per  cent,  of 
its  deposits.  The  moment  it  falls  below  that  amount  it 
must  stop  discounting  until  this  reserve  is  made  good. 
State  banks  are  by  law  required  to  keep  only  15  per  cent, 
reserve,  but  the  Clearing-House,  a  number  of  years  ago, 
adopted  a  rule  requiring  all  State  bank  members  ad- 
mitted after  that  date  to  keep  25  per  cent,  reserve,  the 
same  as  the  National  banks.  The  Trust  Companies 
which  are  members  of  the  Clearing-House  are  required 
by  it,  as  already  stated,  to  keep  25  per  cent,  reserves,  of 
which  however  only  15  per  cent,  need  be  cash  in  their 
own  vaults,  and  the  remainder  held  on  deposit  in  member 
banks. 

When  the  cash  holdings  exceed  the  reserves  required, 
there  is  a  surplus ;  when  the  cash  holdings  fall  below  the 
required  reserve,  there  is  a  deficit.  The  surplus  reserve, 
therefore,  is  the  difference  between  the  required  reserve 
and  the  actual  reserve  when  the  latter  exceeds  the  for- 
mer. There  may  be  an  increase  in  the  surplus  reserve 
when  there  is  a  decrease  in  the  reserve,  which  is  ac- 
counted for  by  a  reduction  in  the  amount  of  reserve 
required  to  a  larger  sum  than  a  reduction  in  the  cash 
holdings. 

Actual  Figures. — The  bank  statement  not  only  gives 
the  exhibit  of  averages  already  shown  on  pages  296-8, 
but  also  a  statement  of  actual  figures  for  the  day  of  issue 
as  follows: 


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302  WORK  OF  WALL  STREET 

More  Complete  Publicity. — But  even  the  bank  state- 
ment does  not  give  the  exhibit  for  all  the  banking  insti- 
tutions in  New  York.  While  all  the  important  banks 
and  trust  companies  are  members,  there  are  a  number  of 
State  Banks  and  Trust  Companies  that  are  not  members, 
and  of  course  their  returns  do  not  figure  in  the  state- 
ment. But  since  the  panic  of  1907,  a  determined  effort 
has  been  made  to  bring  about  more  complete  banking 
publicity,  and  this  has  been  accomplished,  first  by  ad- 
mitting the  principal  trust  companies  to  membership,  and 
second  by  an  arrangement  with  the  State  Banking  De- 
partment under  which  it  reports  to  the  Clearing-House, 
every  Saturday,  the  total  deposits,  loans  and  reserves  of 
the  State  banks  and  Trust  Companies  in  Greater  New 
York  which  are  not  members  of  the  Clearing-House.  By 
combining  these  figures  with  the  Clearing-House  state- 
ment of  averages,  one  can  obtain  an  exhibit  of  banking 
conditions  in  Greater  New  York  that  includes  all  institu- 
tions. Such  an  exhibit  for  January  13th,  was  as  follows : 

Loans    $2,531 .983,WO 

Cash  in  vaults  518.501,000 

Net  deposits 2,410,299,800 

Loans. — Every  analyzer  of  a  bank  statement  studies 
the  item  of  loans.  This  shows  whether  the  banks  are 
expanding  or  contracting.  Contraction  is,  of  course, 
dreaded  by  the  Street,  because  it  involves  the  calling  of 
loans  and  an  advance  in  the  rates  of  money,  making  it 
more  difficult  to  carry  stocks.  On  the  other  hand,  too 
great  expansion  of  loans  may  seem  dangerous,  as  over- 
expansion  has  been  the  chief  cause  of  most  financial 
crises.  Expansion  of  loans  always  increases  the  deposits, 
and  increased  deposits  call  for  larger  reserves. 

It  is  hard  to  make  the  uninitiated  understand  the  sig- 
nificance of  the  word  deposits.  The  deposits  may 
amount  to  $1,000,000,000,  and  yet  the  actual  money  held 


BANK  STATEMENT  AND  MOVEMENT  OF  MONEY       303 

by  the  banks  may  be  only  a  quarter  of  that  sum.  De- 
posits, therefore,  do  not  necessarily  mean  actual  money, 
but  money  and  credit  combined.  For  instance,  $10,000 
in  cash  may  be  deposited  by  A  in  the  bank.  The  bank 
loans  $5,000  to  B,  who  thereupon  holds  it  there  as  a 
deposit  to  draw  from.  The  total  deposits  are,  therefore, 
$15,000,  although  the  actual  cash  is  only  $10,000.  Thus 
an  expansion  in  loans  always  swells  the  item  of  deposits. 

The  Dead  Line. — The  Street  keeps  the  surplus  reserve 
steadily  in  view ;  in  fact  it  may  be  said  to  give  an  exag- 
gerated importance  to  it.  The  line  between  a  surplus 
and  a  deficit  is  regarded  as  a  sort  of  a  "dead  line." 
When  the  surplus  reserve  declines  too  close  to  the  line 
the  Street  begins  to  show  signs  of  alarm.  There  is  talk 
of  stringent  money  and  bear  prices.  If  there  is  a  large 
surplus  reserve,  money  is  easy  and  Wall  Street  feels 
secure.  Yet  too  large  a  surplus  may  be  a  bad  sign,  as  it 
indicates  a  small  demand  for  money;  it  may  therefore 
spell  stagnation.  If  the  statement  as  a  whole  reports  a 
deficit,  Wall  Street  may  have  a  flurry,  even  a  panic. 
Yet  even  a  deficit  may  be  no  just  occasion  for  alarm. 
The  bank  statement  has  at  times  reported  deficits  when 
the  situation  was  sound  and  the  Street  in  a  calm.  For 
instance,  on  October  5,  1889,  there  was  a  deficit  of 
$1,688,050,  which  was  increased  the  following  week,  but 
there  was  no  special  convulsion  in  the  market.  Still  it 
is  true  that  in  time  of  financial  distress,  as  in  the  fall  of 
1890  and  in  1893,  the  first  clear  sign  of  trouble  is  a 
deficit. 

The  25  per  cent,  reserve  is  a  requirement  not  for 
sound  but  for  unsound  banking.  It  is  a  protection  not 
for  the  strong,  but  for  the  weak,  but  it  is  necessary  of 
course  that  the  best  institutions  should  observe  the  rule 
equally  with  the  weak.  There  have  been  suggestions 
that  the  Clearing-House  should  require  a  general  reserve 


304 


WORK  OF  WALL  STREET 


amounting  to  30  per  cent.  But  it  would  be  difficult  to 
say  what  is  the  point  of  safety  or  peril  in  a  reserve.  The 
English  joint  stock  banks  usually  keep  cash  reserves 
much  less  than  those  of  the  New  York  institutions,  and 
the  Scottish  banks  are  able  to  maintain  their  credits  upon 
even  a  smaller  reserve. 

Two   Lines   of   Reserve. — The    most    effective    system 
would  provide  for  two  lines  of  reserve: 

1.  A  big  reserve  in  a  great  central  association  so  held 
as  to  be  easily  put  where  it  would  be  most  required  in 
an  emergency;  and 

2.  Smaller  reserves  in  each  independent  institution. 
Inverted  Pyramid   of   Credit. — Bank   credits   may  be 


represented  by  an  inverted  pyramid.  Now,  an  inverted 
pyramid  is  employed  as  a  common  symbol  of  insecurity, 
but  as  Columbus  stood  an  egg  on  end  by  flattening  it  a 


BANK  STATEMENT  AND  MOVEMENT  OF  MONEY       305 

little  on  the  end,  so  the  inverted  pyramid  of  credit  may 
be  made  secure,  provided  the  reserves  are  ample  enough 
to  inspire  confidence.  The  inverted  pyramid,  as  it  would 
appear  from  the  bank  statement  already  given,  shows 
something  like  the  above.  Now  what  keeps  this  pyramid 
standing?  With  only  $518,000,000  of  actual  cash  on 
hand  in  New  York,  and  $2,416,000,000  of  demand 
deposits,  there  would  be  no  security  if  it  were  not  for 
one  thing:  confidence.  This  then  keeps  the  pyramid 
standing. 

Let  there  be,  however,  a  material  reduction  in  the 
amount  of  cash  on  hand,  and  confidence  would  be  seri- 
ously impaired,  and  in  this  fact  lies  the  importance  of  the 
cash  reserve. 

Manipulation. — More  significant  than  all  the  other 
items  of  a  bank  statement  therefore  are  those  represent- 
ing cash  holdings.  Credit  may  be  the  vital  air  of  the 
whole  financial  system,  but  money  is  the  oxygen  in  the 
air,  without  which  there  would  be  suffocation  and  death. 
So,  in  analyzing  a  bank  statement,  the  reports  of  specie 
and  legal  tenders  are  of  first  importance.  Specie  means 
both  gold  and  silver.  Legal  tenders  mean  any  form  of 
paper  money  that  the  Government  makes  legal  tender  in 
payment  of  debts.  An  increase  in  cash  increases  the 
credit-giving  power  of  the  banks.  A  decrease  in  cash 
involves  a  contraction  of  credit. 

Much  has  been  heard  in  the  Street  from  time  to  time 
of  manipulation  of  the  bank  statement,  for  the  purpose 
of  influencing  the  stock-market.  Manipulation  of  the 
money-market  is  indeed  possible,  but  it  has  been  made 
much  more  difficult  by  the  enlargement  of  the  Clearing- 
House  and  the  more  complete  bank  statement.  A  pos- 
sible way  of  reducing  the  cash  holdings  of  the  banks  is 
to  export  gold.  Another  method  is  to  withdraw  legal 
tenders,  and  deposit  them  in  a  safe-deposit  vault.  Daniel 


306  WORK  OF  WALL  STREET 

Drew  is  said  to  have  carried,  in  1866,  several  millions  of 
dollars  in  cash,  in  a  carriage,  to  Jersey  City,  in  order  to 
produce  a  stringency  in  the  money-market.  There  are 
various  ways  of  hiding  money,  and  of  thus  reducing  the 
power  of  the  banks  to  make  loans.  It  would  be  difficult, 
however,  to  produce  proof  of  manipulation  of  this  char- 
acter in  recent  years.  Suspicion  and  rumor  are  not 
proof.  Moreover,  any  bank  guilty  of  complicity  in  any 
such  conspiracy  would  be  disgraced,  and  any  National 
bank  which  would  continue  to  receive  the  deposits  of  any 
customer  after  he  has  once  withdrawn  money  for  the 
purposes  of  manipulation,  would  be  regarded  as  having 
condoned  a  dishonorable  transaction.  But  hiding  of 
money  to  influence  the  rates  of  loans  and  prices  of  stocks 
does  not  involve  manipulation  of  the  bank  statement 
itself.  That  is  an  honest  exhibition  of  average  and  actual 
conditions  for  the  week  under  review.  There  may  be 
manipulation  outside  the  Clearing-House ;  there  is  none  in 
it. 

Movement  of  Money. — As  the  cash  holdings  of  the 
banks  are  what  constitute  their  power  of  extending 
credit,  the  movement  of  money  becomes  a  matter  of  vital 
importance.  Are  the  banks  gaining  or  losing  cash? 
That  is  the  question  of  questions.  There  ?re  three 
principal  movements  of  money: 

1.  The  export  or  import  of  specie. 

2.  The  shipment  of  currency  to  the  interior  or  receipt 
of  currency  from  the  interior. 

3.  The   payment   of   money   into   the   United    States 
Treasury    and    the    disbursements    of    money    by    the 
Treasury. 

The  currency  movement  from  and  to  the  interior  is 
chiefly  controlled  by  the  deposits  or  withdrawals  by  the 
country  banks.  It  has  already  been  shown  that  these 
banks  can  keep  half  of  their  legal  reserves  in  New  York 


BANK  STATEMENT  AND  MOVEMENT  OF  MONEY       307 

banks  and  draw  interest  thereon.  The  New  York  banks, 
therefore,  are  continually  liable  to  calls  from  these  banks 
whenever  the  local  demand  for  money  becomes  acute. 
In  addition  to  acting  as  depositories  for  the  reserves  of 
the  country  banks,  the  New  York  banks  act  practically 
as  clearing-agents  for  a  large  part  of  the  commerce  of 
the  United  States.  Thus  interior  manufacturers  and  ag- 
riculturists are  continually  sending  their  products  to 
New  York  for  sale.  The  money  paid  for  these  products 
is,  of  course,  paid  through  the  banks.  On  the  other 
hand,  the  interior  is  continually  buying  articles  of  mer- 
chandise in  New  York,  and  the  money  paid  for  these 
articles  is  paid  through  the  banks,  so  that  there  is  a  con- 
stant inflow  and  outflow  of  money.  The  "Wall  Street  man 
watches  this  movement  keenly,  as  on  it  may  depend  the 
course  of  the  stock-market.  If  New  York  is  sending  to 
the  interior  more  than  it  is  receiving,  the  banks  are  losing 
cash,  and  there  will  be  a  contraction  of  loans,  unless  the 
loss  to  the  interior  should  be  counterbalanced  by  im- 
ports of  gold  or  heavy  Treasury  disbursements.  On  the 
other  hand,  if  the  balance  is  in  favor  of  New  York  the 
banks  should  be  gaining  cash. 

The  Street  is  not  content  to  wait  for  the  bank  state- 
ment for  knowledge  of  the  movement  of  money.  The 
exports  and  imports  of  gold  are  generally  known  soon 
after  arrangements  are  made  for  the  shipments.  Daily 
statements  are  given  of  the  receipts  and  disbursements 
of  the  Treasury,  and  fairly  complete  statistics  of  the  in- 
terior movement  are  obtained .  during  the  week  by 
inquiry  at  the  leading  banks,  which  have  large  dealings 
with  interior  institutions. 

During  the  year  1911  the  following  movement  of 
money  into  and  out  of  New  York  was  reported  to  Dow, 
Jones  &  Co.,  from  data  supplied  by  the  banks: 


308 


WORK  OF  WALL  STREET 


Recapitulation  Currency  Movements  1911 : 
(000  omitted). 


Into  banks. 

Out  of  banks. 

Banks  gain. 

Banks  loss. 

Interior    .... 

$    087.038 

408,801 

$218,177 

Gold     

92,998 

0,008 

80,990 

Sub-Treasury 

911,900 

1,159,900 

$247  994 

Total    . 

.  .$1,092,002 

$1,034,829 

*$57.173 

*Net. 


The  statistics  for  ten  years  are  as  follows : 


Into  banks. 

Out  of  banks. 

Banks  gain. 

Banks  lose. 

1911 

1,092,000.000 

1,034,829.000 

57.173,000 

1910 

1,900,080,000 

1,900,010,000 

0,070,000 

1909 

1,857,101,700 

l,89G,Oil,400 

$39,449,700 

1908 

1.913,250,200 

1,785,415.800 

127,840,400 

1907 

.  .  .  1  741,002,700 

1,705,980,300 

35,010,400 

1900 

1  791,585.300 

1  781,020,000 

10,558,700 

1905 

1,440,903300 

1,530.354,400 

89,451,100 

1904 

1012,141.100 

1  478,722,800 

133,418,300 

1903 

1  355  720,300 

1,299,337.000 

50,382,700 

1902 

..1  203.142200 

1,188.448.700 

14.093,500 

1901 

..1,300.429.500 

1,254,733,200 

45,090,300 

Thus  during  the  year  1911,  $1,692,002,000  came  into 
the  banks  of  New  York  through  these  various  movements 
and  $1,634,829,000  went  out  of  the  banks  in  these  ways. 
Of  the  three  movements,  that  to  and  from  the  interior  is 
the  most  interesting.  The  record  by  months  in  1911  is 
as  follows: 

The  Interior  Movement  in  1911. 


Receipts. 

Shipments 

Gain. 

January    

$  03,437,000 

$  33,029,000 

$  30,408.000 

February    

49,433,000 

26,967,000 

22,400.000 

47,178,000 

36,069,000 

11,109.000 

April    

61,291,000 

32,811,000 

28,480.000 

Mav    

63,726,000 

53,004,000 

10,122,000 

June  

06,856,000 

38,560,000 

28,290,000 

July    

56,862,000 

39,402,000 

17,400,000 

August  

61,979,000 

b9,455,000 

22,524,000 

September    .... 

39,948.000 

38,203,000 

1,745,000 

October    

39,271.000 

36,414,000 

2,857,000 

November    

55,747,000 

56.400,000 

t653 

December    ..... 

81,310,000 

37,947,000 

43,363,000 

<?f  0"  AOQ  />AA 

e  1«C  CfM  AAA 

*coic  -iT^nnn 

*Net 


f  Loss. 


BANK  STATEMENT  AND  MOVEMENT  OF  MONEY       309 

In  domestic  as  in  foreign  exchange  there  comes  a  time 
when  balances  have  to  be  settled  in  cash.  These  settle- 
ments may  be  delayed  by  various  causes.  For  instance, 
if  rates  for  loans  are  higher  here  than  in  the  interior,  the 
interior  institutions,  instead  of  calling  for  the  money  due 
them,  may  loan  it,  in  the  New  York  market.  Western 
loans  in  New  York  have  become  a  feature  in  the  money- 
market  in  the  last  few  years. 

An  anxious  period  in  the  money-market  is  the  crop- 
moving  time.  That  is  the  period  of  the  year  when  the 
grain  crops  of  the  West  and  the  cotton  crops  of  the 
South  are  being  harvested  and  forwarded  to  the  markets. 
When  it  is  recalled  that  in  1910  there  were  nearly  three 
and  one-half  billion  bushels  of  corn,  oats,  and  wheat,  and 
more  than  five  billion  pounds  of  cotton  produced,  some 
conception  may  be  had  of  the  service  the  banks  of  the 
country  performed  in  financing  the  harvesting  of  these 
immense  crops.  Not  all  the  burden  of  this  falls  on  the 
New  York  banks,  but  a  heavy  share  of  it  does,  and  it 
takes  a  large  sum  of  money  out  of  Wall  Street  in  the  last 
half  of  the  year.  This  movement  requires  shipments  of 
currency,  usually  in  bills  of  small  denominations.  The 
banks  can  send  this  money  by  express  or  registered  mail 
or  by  telegraphic  transfers  through  the  Subtreasury. 
The  latter  is  the  more  convenient  and  the  quickest  way, 
but  is  restricted  to  Subtreasury  points.  By  depositing 
in  the  Subtreasury  the  amounts  required  to  be  shipped, 
that  institution  will  telegraph  to  another  Subtreasury  to 
pay  a  similar  amount  to  the  bank  which  is  to  receive  the 
currency  in  that  city. 

The  crop-moving  period  often  subjects  Wall  Street  to 
a  severe  strain.  The  stock-market  has  more  than  once 
suffered  from  this  cause,  and  the  Treasury  has  been 
called  upon  to  afford  relief  by  buying  bonds,  in  order  to 
liberate  money  held  in  the  Treasury  and  which  can  be 
got  into  circulation  in  no  other  way. 


310  WORK  OF  WALL  STREET 

Mr.  Paul  M.  Warburg  of  the  great  banking-house  of 
Kuhn,  Loeb  &  Co.,  in  an  address  before  the  American 
Bankers'  Association  in  1911  said  concerning  the  move- 
ment of  money: 

This  overflow  of  money,  which  in  times  of  ease  floods  New 
York,  and  which  in  times  of  need  is  withdrawn  with  such  ve- 
hemence that  it  causes  violent  convulsions,  is  no  blessing,  but  a 
source  of  danger  to  that  city.  While  our  present  system  makes 
New  York  the  undoubted  money  center  and  gives  to  its  banks  a 
position  of  pre-eminence  and  predominance,  this  power  is  pos- 
sessed only  at  the  expense  of  a  responsibility  which,  with  our 
present  system,  in  times  of  stress  brings  mortification. 

This  is  very  true,  but  the  Wall  Street  system  ought  to 
be  safe  enough  and  elastic  enough  to  provide,  at  the  same 
time,  for  the  varying  needs  of  commerce  and  the  full 
reasonable  requirements  of  the  securities  market. 

A  great  money-market  like  that  of  New  York,  as 
already  noted,  possesses  many  sources  of  supply  of 
credit.  High  interest  rates  open  the  conduits  through 
which  streams  flow  from  one  or  more  reservoirs  of 
credit.  From  the  Transvaal  to  the  Klondyke  come  new 
supplies  of  the  yellow  metal.  Australian  gold,  imported 
into  San  Francisco,  is  instantly  made  available  in  New 
York  by  telegraphic  transfer  through  the  Treasury. 
Great  banks  in  Chicago  and  other  Western  cities  make 
direct  loans  in  Wall  Street  on  stock  collateral  or  com- 
mercial paper.  Europe,  by  a  transfer  of  credit,  loans  its 
capital  in  New  York,  or,  if  the  interest  rates  advance 
high  enough,  foreign  exchange  rates  may  decline  to  the 
importing  point,  and  an  actual  stream  of  gold  flows  into 
the  Street. 

Bank  of  England  Statement. — Wall  Street  not  only 
watches  its  own  bank  statement,  but  so  intimately  con- 
nected have  become  all  the  markets  of  the  world  that  it 


BANK  STATEMENT  AND  MOVEMENT  OF  MONEY       311 

also  studies  the  statements  of  the  big  Government  banks 
of  Europe.  The  Bank  of  England  statement  is  issued  on 
Thursday,  and  the  trained  eye  of  the  financier  can  read 
in  it  the  conditions  of  the  English  money-market,  which 
is  the  most  powerful  in  the  world.  The  Bank  of  England 
discount  rate  sounds  the  keynote  of  the  international 
monetary  situation. 


22 


CHAPTER  XXI 
SUBTREASURY  AND  ASSAY  OFFICE 

It  has  become  almost  an  unwritten  law  of  politics  that 
no  Secretary  of  the  Treasury  can  be  selected  from  Wall 
Street.  The  reason  for  this  is  obvious.  Many  people 
fear  the  power  of  the  Street,  and  do  not  want  it  to  have 
too  strenuous  an  influence  in  the  Treasury  Department. 
Yet  every  Secretary  of  the  Treasury,  from  whatever  sec- 
tion of  the  country  he  comes,  is  inevitably  brought  into 
intimate  relations  with  Wall  Street.  It  is  not  meant  by 
this  that  the  Secretary  engages  in  stock  speculation  or 
uses  his  official  power  to  advance  or  depress  prices.  No 
such  scandal  as  that  has  developed.*  But  there  is  the 
closest  possible  bond  between  the  Treasury  and  the 
money-market.  When  the  Government  needs  money  for 
the  purposes  of  war,  it  must  come  to  the  money-market 
for  it.  When  it  desires  gold  in  order  to  maintain  specie 
payments,  it  has  to  come  to  the  Street  for  it.  When  it 
desires  to  refund  its  bonds  at  a  lower  rate  of  interest,  the 
operation  generally  has  to  go  through  Wall  Street.  If, 
on  the  other  hand,  the  business  interests  require  relief 
which  the  Treasury  is  able  to  afford,  it  is  mainly  through 
Wall  Street  that  the  Treasury  is  able  to  let  out  a  part 
of  its  surplus  by  means  of  payments  for  bond  redemp- 
tions. In  a  score  of  ways  the  Treasury  and  the  Street 
are  brought  into  close  contact. 

*  "The  Secretary  of  the  Treasury,  by  his  control  of  the  public 
debt,  has  no  doubt  means  of  affecting  the  markets;  but  I  have  never 
heard  of  any  charge  of  improper  conduct  in  such  matters  on  the 
part  of  anyone  connected  with  the  Treasury  Department." 

PBOF.  JAMES  BBYCE  in  "The  American  Commonwealth." 
312 


SUBTREASURY  AND  ASSAY  OFFICE  313 

Assistant  Treasurer. — The  Secretary  of  the  Treasury 
is  the  head  of  the  three  greatest  institutions  of  Wall 
Street,  the  Subtreasury,  the  Assay  Office,  and  the  Cus- 
tom-House.  His  direct  representative  in  the  Street  is  the 
Assistant  Treasurer,  who  is  a  member  of  the  Clearing- 
House,  through  which  the  Subtreasury  makes  its  daily 
exchanges  the  same  as  a  bank.  In  times  of  financial  dis- 
tress, it  is  customary  for  the  Secretary  to  meet  the  lead- 
ing bankers  at  the  Subtreasury  to  consider  measures  of 
relief.  The  Assistant  Treasurer  is  an  official  of  higher 
standing  than  his  title  would  indicate.  He  draws  a  sal- 
ary even  larger  than  that  of  the  Treasurer  at  Wash- 
ington. 

Government  Finances. — Through  the  Subtreasury  flow 
more  than  one-half  of  the  aggregate  receipts  and  expend- 
itures of  the  United  States  Government.  Into  it  flow  the 
receipts  of  the  Custom-House,  of  the  Post-Office,  and  of 
other  large  Government  offices.  Out  of  it  flow  the  pay- 
ment of  interest  on  bonds,  payments  for  pensions,  and 
the  manifold  disbursements  of  the  Government  for  army, 
navy,  and  other  purposes.  The  Subtreasury  is  also  the 
effective  agency  of  the  Government  in  the  floating  of  new 
loans,  in  the  redemption  of  bonds,  and  the  larger 
financial  policies  of  the  Treasury  Department.  The  high 
standing  of  the  office  of  Assistant  Treasurer  is  indicated 
by  the  character  of  the  men  who  have  held  it  since  its 
establishment  in  1846. 

The  establishment  of  the  Subtreasury  followed  the  fall 
of  the  United  States  Bank,  and  for  sixty-six  years  it  has 
been  the  basis  of  the  Government's  financial  system. 
The  office  was  established,  with  a  number  of  similar 
branches  of  the  Treasury  in  other  large  cities,  pursuant 
to  the  Act  of  Congress  of  August  6,  1846.  The  purpose 
of  the  act  was  to  safeguard  the  funds  of  the  Federal 
Government,  large  amounts  of  which  had  been  lost  by 


314  WORK  OF  WALL  STREET 

the  failures  of  depositary  banks  in  which  the  revenues 
were  kept  after  the  expiration  of  the  charter  of  the 
second  Bank  of  the  United  States  in  1836. 

Deposits  in  National  Banks. — Until  the  creation  of 
national  banks  by  the  act  of  June  3,  1864,  not  a  dollar  of 
government  revenue  ever  went  into  a  bank.  The 
national  bank  act  permitted  such  deposits  where  pro- 
tected by  adequate  security;  but  the  policy  of  the  gov- 
ernment varied  as  to  the  use  of  the  permission ;  political 
prejudices,  born  in  the  forties,  continued  to  influence  the 
policy. 

Hence,  except  in  recent  years,  the  major  part  of  the 
Treasury's  balance  was  usually  kept  in  the  subtreasuries. 
Accordingly  when  the  balance  was  large,  a  substantial 
part  of  the  country's  money  supply  was  locked  up  in  the 
Treasury  vaults,  to  the  detriment  of  business.  As  far 
back  as  1853,  and  periodically  since  that  year,  this 
process  of  keeping  money  out  of  circulation  created 
stringency.  The  anomalous  condition  arose  of  having 
financial  trouble  when  the  country  was  at  its  most  pros- 
perous periods  because  then  the  Government's  revenues 
and  surplus  were  largest.  The  sole  resource  to  relieve 
stringencies  was  the  purchase  of  Government  bonds  be- 
fore maturity  at  heavy  premiums,  obviously  a  wasteful 
policy. 

Number  of  Subtreasuries. — There  are  nine  subtreas- 
uries in  all,  but  the  one  at  New  York  transacts  fully  two- 
thirds  of  the  business,  and  carries  the  largest  balance. 
In  1910  the  gross  receipts,  including  currency  and  coin 
received  for  redemption  and  exchange,  amounted  to 
$1,809,451,848;  the  gross  payments  were  $1,888,336,995; 
the  balance  June  30,  1910,  was  $150,210,685. 

The  greater  part  of  the  balance  consisted  of  trust 
funds,  chiefly  coin  held  for  coin  certificates  outstanding. 

Influence   on    Money-Market. — Since  the   average    re- 


SUBTREASURY  AND  ASSAY  OFFICE  315 

ceipts,  or  withdrawals  of  money  are  thus  very  large,  the 
transactions  have  an  influence  on  the  money-market. 
Therefore  it  was  determined  some  twenty  years  ago,  that 
the  public  was  entitled  to  know  the  extent  of  this  influ- 
ence, and  the  daily  net  cash  receipts  and  payments  have 
been  published  since.  Thus  bankers  may  keep  advised 
of  the  situation  created  by  Treasury  operations ;  and  the 
figures  aid  those  interested  in  forecasting  the  weekly 
bank  statement. 

The  New  York  Subtreasury  is  also  the  chief  office  for 
furnishing  gold  for  export;  this  is  obtained  by  bankers 
in  exchange  for  gold  certificates  or  in  redemption  of 
United  States  notes.  When  exporters  prefer  gold  bars 
from  the  Assay  Office,  the  transaction  is  made  through  a 
transfer  in  the  accounts  between  the  two  offices. 

Transfers  of  Money. — A  very  useful  function  of  the 
subtreasuries  is  that  of  making  speedy  transfers  of 
money  between  the  leading  centers.  Having  usually  sub- 
stantial balances  in  each  of  the  offices,  bankers  and  mer- 
chants may  deposit  cash  at  New  York  and  have  the 
amount  paid  out  on  telegraphic  order  at  say  New 
Orleans,  Chicago,  etc.  These  transfers  are  important  in 
facilitating  crop  movements. 

When  San  Francisco  was  destroyed  by  earthquake  in 
1906,  this  transfer  system  was  a  most  beneficent  means 
of  providing  funds  to  carry  on  the  current  business  and 
for  rehabilitation.  The  catastrophe  had  locked  up  the 
vaults  of  most  of  the  banks;  their  credit  in  New  York, 
however,  was  unimpaired  and  by  means  of  transfers  by 
wire,  the  Treasury  funds  in  San  Francisco  which  were 
accessible,  were  used  to  the  amount  of  $35,000,000. 

The  New  York  Subtreasury  has  been  a  member  of  the 
Clearing-House  for  the  purpose  of  exchanging  checks, 
since  1879.  The  laws,  until  recently,  still  required  that 
a  large  part  of  the  payments  to  the  Government  be  made 


316  WORK  OF  WALL  STREET 

in  actual  cash,  which  continued  to  aggravate  the  "lock- 
ing up"  process;  but  a  law  of  1911,  operative  June  1, 
permitted  the  acceptance  of  checks  for  Government  dues, 
which  are  then  "cleared,"  obviating  the  use  of  cash. 

Archaic  System. — Nevertheless  in  the  opinion  of  those 
best  qualified  to  judge,  the  Subtreasury  system  is  re- 
garded as  archaic  and  calculated  to  breed  dangerous  con- 
ditions. Its  abolition,  and  the  substitution  of  a  central 
bank  agency,  is  hence  advocated  by  most  economists.  If 
the  present  movement  for  a  central  reserve  organiza- 
tion should  prove  successful,  this  abolition  may  be  ac- 
complished. 

The  work  of  the  Subtreasury  includes  the  receipt  of 
money  due  the  Government  from  any  source ;  the  largest 
single  item  of  this  character  is  the  customs  revenue  col- 
lected at  the  port  of  New  York.  Direct  receipts  of  in- 
ternal revenue  are  small,  since  the  bulk  of  these  funds  is 
deposited  in  banks;  but  since  the  banks  are  required  to 
transfer  such  receipts  to  a  Subtreasury  when  the  sum 
held  exceeds  the  security,  and  most  of  them  prefer  to 
transfer  by  drafts  on  New  York,  a  very  large  part  of  the 
internal  revenue  from  all  over  the  country  finds  its  way 
to  the  New  York  Subtreasury.  Postmasters  also  deposit 
their  receipts  there;  national  banks  all  over  the  country 
use  New  York  drafts  to  make  payments  due  by  them  on 
account  of  their  note-redemption  funds,  taxes,  etc. 

The  greater  part  of  the  many  disbursing  officers  and 
paymasters  of  the  Government  have  accounts  at  the  New 
York  office,  drawing  checks  aggregating  many  millions 
annually ;  interest  on  the  debt  is  also  paid  here  and  when 
bonds  are  redeemed  it  is  done  by  checks  of  the  Treasurer. 

Much  of  the  work  arises  from  the  exchange  of  money ; 
thus  gold  and  silver  is  received  for  certificates  and  coin 
is  paid  out  for  certificates  and  notes ;  small  silver,  nickel 
and  bronze  coins  are  taken  in  and  notes  given  in  ex- 


SUBTREASURY  AND  ASSAY  OFFICE  317 

change,  and  such  coins  are  given  out  for  notes  and  larger 
coin. 

The  Subtreasury  comes  in  direct  contact  with  Stock 
Exchange  houses  that  deal  in  Government  bonds  in  the 
business  connected  with  the  transfers  of  registered 
bonds,  for  which  purpose  a  separate  division  exists. 

Trained  Work. — The  work  requires  trained  men,  ex- 
pert money  counters  and  accountants;  they  must  be 
familiar  with  the  many  laws  governing  the  operations. 
Practically  the  entire  body  of  employes  under  the  sub- 
treasurer  is  placed  under  the  civil  service  law,  and  po- 
sitions are  held  during  good  behavior.  The  fact  that  the 
enormous  transactions  have  been  conducted  without  loss 
is  evidence  of  the  faithfulness  and  efficiency  of  the 
employes. 

The  regulations  require  that  a  report  be  forwarded  to 
Washington  each  day  of  the  transactions  of  the  previous 
day,  stated  by  kinds  of  money,  sources  of  receipt  and 
channels  of  disbursement;  with  a  balance  sheet  in  which 
in  addition  to  the  kinds  of  money  in  hand  the  denomina- 
tions of  each  kind  are  set  forth.  Thus  the  Treasury  is 
informed  daily  of  the  supply  of  one-cent  pieces,  five- 
cent  pieces,  dimes,  etc.,  in  the  vaults;  it  rarely  happens 
that  the  accounts  do  not  prove  to  a  cent. 

Assay  Office. — The  Assay  Office  is  a  branch  of  the 
United  States  Mint,  and,  as  its  name  indicates,  it  receives 
and  assays  deposits  of  gold  and  silver  and  returns  the 
same  to  the  depositors  in  the  shape  of  bars,  or  the  Gov- 
ernment will  give  coin  for  the  value  of  the  gold.  An  in- 
teresting book  could  be  written  about  the  Assay  Office, 
its  methods  of  melting  and  refining,  and  its  marvelous 
scales,  which  are  so  delicately  adjusted  that  they  can 
weigh  one-half  of  one  hair  of  a  person 's  head.  It  is  from 
this  office  that  the  exporters  of  gold  obtain  most  of  the 
yellow  metal  for  shipment;  and  it  is  in  this  connection 


318  WORK  OF  WALL  STREET 

that  the  Assay  Office  becomes  an  important  part  of  the 
mechanism  of  Wall  Street.  In  this  office  we  are  con- 
fronted with  the  evidence  of  the  dual  character  of  gold 
as  money  or  a  medium  of  exchange,  and  as  merchandise, 
an  article  itself  bought  and  sold  the  same  as  pig-iron. 
The  Assay  Office  makes  two  kinds  of  gold  bars  for  sale: 
small  bars  varying  in  value  from  $100  to  $700,  which  are 
bought  for  use  in  the  arts  and  sciences;  and  large  bars 
varying  in  value  from  $5,000  to  $8,000,  which  are  used 
for  the  export  of  the  precious  metal.  These  bars  are 
stamped  with  weight  and  fineness  as  ascertained  by  the 
assay.  Exporters  pay  4  cents  per  $100  for  them,  but 
even  at  this  cost  the  bars  are  cheaper  than  coin  would  be. 

The  coin  can  be  obtained  without  premium  at  the  Sub- 
treasury  on  presentation  of  legal  tenders,  but  coin  is  in- 
ferior to  bars  for  export,  because  more  easily  abrased. 
The  stamp  of  the  United  States  on  a  coin  is  effective  only 
within  our  own  boundaries.  As  soon  as  the  coin  reaches 
a  foreign  country,  its  value  is  determined  not  by  the 
stamp  upon  it  but  by  its  weight.  So,  when  we  are  com- 
pelled to  pay  our  debts  by  a  gold  shipment,  the  gold, 
whether  it  be  bars  or  coin,  is  weighed  and  its  value  ascer- 
tained. Coin  loses  value  by  handling.  Even  new  coin 
carried  in  bags  loses  value  by  abrasion  during  the  trip 
across  the  Atlantic.  It  is  stated  at  the  Assay  Office  that 
if  a  bag  of  gold  coin  is  put  on  the  scales  and  weighed, 
then  lifted  on  to  the  floor,  and  then  immediately  put  on 
the  scales  again,  the  mere  movement  which  this  simple 
operation  has  involved  will  cause  an  abrasion  such  as  will 
show  a  difference  in  weight.  Bars,  on  the  other  hand, 
can  be  easily  handled  without  much,  if  any,  friction. 
When  they  arrive  on  the  other  side  there  is  little  loss  in 
weight.  In  a  big  gold  shipment  this  means  much. 

Some  objection  has  been  made  to  the  policy  of  the  Gov- 
ernment facilitating  gold  shipments  by  the  sale  of  these 


SUBTREASURY  AND  ASSAY  OFFICE  319 

bars.  But  in  answer  to  this  it  is  argued  that  when  we 
owe  money  to  Europe  and  our  creditors  demand  pay- 
ment, we  must  pay,  whatever  the  cost  of  shipment.  If 
our  own  Government  increases  the  cost  of  obtaining  the 
gold  for  payment,  that  makes  no  difference  to  our  cred- 
itors, but  it  does  to  us  as  the  debtors,  because  it  makes 
our  burden  and  expense  greater.  In  facilitating  ship- 
ments, therefore,  we  are  not  doing  a  favor  to  Europe, 
but  to  ourselves.  The  Treasury,  indeed,  suspended  the 
sale  of  bars  for  several  years,  during  that  perilous  period 
when  the  Government  was  struggling  to  maintain  its 
gold  reserves.  But  the  situation  has  been  changed  by 
the  enactment  of  the  Gold  Standard  Law  of  1900,  and  the 
breaking  of  the  endless  chain  of  greenback  redemptions. 
The  Assay  Office  occupies  one  of  the  oldest  buildings 
in  Wall  Street,  but  it  is  now  being  completely  recon- 
structed. It  was  erected  in  1823,  and  was  for  many 
years  occupied  by  the  New  York  branch  of  the  United 
States  Bank.  After  that  it  was  leased  to  private  bank- 
ers, but  in  1853  was  purchased  by  the  Government  and 
was  first  occupied  by  the  Subtreasury.  What  is  now  the 
Subtreasury  building,  with  its  Greek  facade  and  its 
eight  Doric  columns,  was  built  by  the  Government  on  the 
site  of  the  old  Federal  Hall  for  the  Custom-House,  which 
occupied  it  until  1872,  when  that  branch  of  the  Govern- 
ment was  removed  to  the  Merchants'  Exchange  Building, 
and  the  Subtreasury  took  its  place.  It  is  one  of  the  most 
imposing  structures  in  New  York,  and  no  other  is  so 
rich  in  historical  associations.  On  the  stone  steps  of  the 
Subtreasury  there  stands  a  statue  of  Washington,  in 
commemoration  of  his  first  inauguration.  The  very 
stone  on  which  the  Father  of  his  Country  stood  on  that 
occasion  is  preserved  inside  the  building.  The  statue 
was  unveiled  in  1883  by  Governor  Grover  Cleveland,  and 
President  Arthur  and  George  William  Curtis  made  ad- 


> 
320  WORK  OF  WALL  STREET 

dresses.  Six  years  later  the  Centennial  of  the  Inaugura- 
tion was  celebrated  there,  with  addresses  by  President 
Harrison  and  Chauncey  M.  Depew,  and  an  ode  by 
"Whittier.  Many  memorable  public  meetings  have  been 
held  in  front  of  the  Subtreasury,  and  it  was  there,  in 
1865,  during  the  excitement  that  followed  the  news  of 
Lincoln's  assassination,  that  James  A.  Garfield  gave  ut- 
terance to  the  ringing  sentence,  "God  reigns  and  the 
Government  at  Washington  still  lives." 

REFERENCES 

"The  Independent  Treasury  of  the  United  States  and  Its  Rela- 
tions to  the  Banks  of  the  Country,"  David  Kinley,  1910, 
National  Monetary  Commission  S.  No.  587. 


CHAPTER  XXII 
FOREIGN    EXCHANGE    AND    THE    BALANCE    OF    TRADE 

The  foreign  exchange  transactions  of  "Wall  Street  are 
of  enormous  extent,  but,  as  already  said,  there  are  no 
statistics  by  which  they  can  be  measured.  The  volume 
of  the  foreign  commerce  of  the  United  States  is,  of 
course,  accurately  ascertained,  but  the  financing  of  this 
forms  only  a  part  of  the  foreign  exchange  market. 

Foreign  exchange  is  not  merely  a  mechanism  by  which 
the  money  of  one  country  is  converted  into,  or  exchanged 
for,  the  money  of  another  country.  It  is  a  system  of 
credits  by  which  one  country  liquidates  its  indebtedness 
to  another,  and  this  indebtedness  may  represent: 

a — Raw  or  manufactured  products  purchased; 

b — securities  bought; 

c — interest  upon  capital  invested  abroad; 

d — money  borrowed; 

e — expenses  of  travelers; 

f — freights  and  insurance. 

The  mechanism  of  the  exchange  market  supplies  facil- 
ities by  which  payments  are  made  for  these  several 
things  by  means  of  various  forms  of  paper  which,  under 
different  names,  perform,  in  foreign  transactions,  prac- 
tically the  same  service  which  checks,  drafts,  notes  and 
commercial  paper  do  in  domestic  transactions. 

Among  the  bills  issued  in  foreign  exchange  are  "com- 
mercial bills,"  which  are  drawn  upon  foreign  purchasers 
of  American  merchandise,  as  for  instance  cotton  and 
grain,  or  upon  banks  designated  by  them,  and  which  are 
generally  accompanied  by  bills  of  lading  and  insurance 
certificates,  but  sometimes  without  this  protection; — 

321 


322  WORK  OF  WALL  STREET 

"security  bills"  which  cover  purchases  of  securities; — 
"finance  bills"*  which  are  unsecured  and  are  drawn  by 
bankers  who  thus  use  their  credit  to  obtain  money,  and 
these  bills  are  employed  freely  in  times  of  financial 
strain; — "letters  of  credit,"  which  are  sold  to  travelers, 
enabling  them  to  draw  money  from  designated  bankers 
in  foreign  countries;  and  "cable  transfers,"  by  which 
transfers  of  credit  are  made  by  cable  instead  of  the 
slower  process  of  using  the  mails. 

*  The  issuing  of  finance  bills  is  without  doubt  one  of  the  most 
intricate  forms  of  foreign  exchange  business,  but  as  it  is  a  practice 
which  is  carried  on  to  a  perfectly  enormous  extent  and  has  an  im- 
portant bearing  on  all  money-market  questions,  at  least  an  idea  of 
what  the  business  is,  is  essential.  The  finance  bill  is  simply  a  60  or 
90  day  bill  of  exchange  drawn  by  an  American  banker  on  some 
banker  in  London  with  whom  he  has  an  understanding  regarding 
such  transactions.  If  the  credit  of  both  houses  is  good  the  Ameri- 
can banker  will  have  no  difficulty  in  selling  the  bill  in  the  exchange 
market  and  with  the  proceeds  he  can  do  as  he  likes,  knowing,  how- 
ever, that  the  finance  bill  he  has  set  afloat  will  be  immediately  re- 
mitted to  London,  "accepted"  by  the  bank  on  which  it  is  drawn, 
and  90  days  later  will  be  presented  for  payment.  The  London 
banker  who  has  "accepted"  the  finance  bill  when  it  was  first  pre- 
sented to  him  knows  that  before  the  bill  falls  due  and  he  has  to 
pay  it  he  will  be  provided  with  the  necessary  funds  by  the  Ameri- 
can bank  which  issued  the  finance  bill  on  him. 

The  whole  transaction  in  fact  is  equivalent  to  the  American 
houses  raising  money  on  an  unsecured  note  which  has  been  made 
payable  in  a  foreign  country.  The  advantage  to  a  house  whose 
credit  is  good  enough  to  do  this  business  is  evident.  In  a  sudden 
high  money-market  in  New  York,  for  instance,  millions  upon  millions 
are  raised  by  the  sale  of  finance  bills.  For  "accepting"  the  bills 
the  foreign  banker  charges  a  commission  of  course  and  the  Ameri- 
can drawer  of  the  ninety-day  finance  bills  (from  the  sale  of  which 
he  received  only  the  90-day  rate)  has  to  cover  their  maturity  at  the 
end  of  90  days  with  demand  exchange,  but  these  charges  are  trifling 
in  comparison  with  what  he  can  earn  on  the  money  in  the  mean- 
time if  the  money-market  happens  to  be  really  high. 

American  finance  bills  discount  better  in  the  London  market  than 
those  drawn  from  any  other  country,  a  circumstance  which  is  ma- 
terially responsible  for  the  extensive  way  they  are  issued  whenever 
money  rates  rise.  The  London  banks  like  to  be  drawn  on  in  this 
way,  because  there  is  a  good  commission  in  the  business,  and  they 
are  not  required  to  put  up  a  cent  of  money,  knowing  perfectly  well 
that  at  the  end  of  ninety  days  "cover"  to  meet  the  maturity  of  the 
bills  will  be  provided  by  the  New  York  banker  who  set  them  afloat. 
FRANKLIN  ESCHEB  in  "Dun's  Review." 


FOREIGN  EXCHANGE  323 

The  greater  part  of  the  commerce  of  the  world  [says  Aluhle- 
man  in  "Monetary  and  Banking  Systems"]  is  paid  for  by  the 
drawing  of  bills  of  exchange  which  are  classed  as  commercial 
bills ;  a  portion,  however,  is  paid  for  by  the  remittances  of  bank- 
ers' bills.  The  commercial  bills  are  usually  payable  at  a  future 
date — say  sixty  or  ninety  days  with  us,  much  longer  periods 
with  other  mercantile  nations.  Bankers  discount  these,  paying 
the  shipper  of  commodities  at  once ;  brokers  make  it  a  business 
to  collect  them  for  bankers,  and  there  are  regular  market  prices 
for  them.  Thus  sterling  bills  (i.e.  payable  in  £)  were  quoted  on 
a  given  date  at  4.83^  for  sixty-day  paper  which  was  the  price 
bankers  were  willing  to  pay  for  them.  The  difference  between 
this  price  and  $4.8G§,  the  parity,  represents  the  discount  or  in- 
terest for  sixty  days,  the  cost  of  collection  and  a  slight  margin 
for  profit. 

The  buying  and  selling  of  these  various  kinds  of  paper 
constitutes  the  main  business  of  the  foreign  exchange 
market,  and  in  doing  this  it  practically  serves  as  an  inter- 
national clearing-house,  for  it  offsets  one  debt  by 
another,  and  thus  by  a  series  of  eliminations  reduces  to 
a  comparatively  small  sum  the  amount  of  actual  money 
which  one  country  is  compelled  to  pay  to  another  coun- 
try, and  even  the  liquidation  of  that  amount  may  be 
delayed  by  methods  of  deferred  payments. 

Simple  as  are  the  basic  principles  of  foreign  exchange, 
it  becomes  so  intricate  in  all  of  its  ratifications  over  an 
area  as  wide  as  the  world  itself,  involving  transactions 
as  great  as  the  volume  of  the  world's  international  com- 
merce, that  comparatively  few  have  a  complete  grasp  of 
its  details.  Many  experienced!  bankers  even  are  unable 
to  calculate  the  profit  of  a  gold  shipment.  International 
banking-houses  have  difficulty  in  training  their  clerks  in 
this  branch  of  their  business.  The  young  men  can  be 
taught  to  do  one  or  two  routine  things,  but  as  far  as 
any  large  comprehension  of  the  subject,  that  is  difficult 
to  learn.  The  writer  is  informed  that  the  leading  ex- 


324  WORK  OF  WALL  STREET 

perts  in  foreign  exchange  are  men  trained  in  the  German 
and  French  universities.  The  subject  is  so  large  that  it 
can  be  treated  in  this  chapter  only  in  its  general  outlines. 

In  primitive  times  all  trade  was  a  matter  of  barter. 
An  ox  was  exchanged  for  a  horse,  a  camel  for  a  slave,  etc. 
Then  money  was  invented  as  a  medium  of  exchange.  The 
bill  of  exchange  was  another  step  in  advance.  It  became 
burdensome,  expensive,  and  perilous  to  transfer  a  sum 
of  money  over  a  considerable  distance  in  settlement  of 
every  transaction.  It  was  discovered  to  be  easier  and 
cheaper  to  make  such  settlements  by  transfers  of  credits. 
Thus  was  evolved  what  is  known  as  the  system  of  do- 
mestic and  foreign  exchange,  domestic  applying  to  ex- 
changes within  one's  own  country,  and  foreign  to  ex- 
changes with  other  countries.  Foreign  exchange  is  more 
complicated,  because  each  country  has  a  different  coin- 
age, and  a  transaction  in  foreign  exchange  therefore  in- 
volves both  a  calculation  of  the  difference  between  coins 
and  of  the  relative  position  of  the  two  countries  as  re- 
gards credit. 

Misconceptions. — Many  popular  misconceptions  exist  as 
to  foreign  exchange.  A  common  misconception  is  that  it 
means  simply  an  exchange  of  the  coin  of  one  country  for 
the  coin  of  another.  It  does  mean  that,  but  it  means  much 
more.  An  exchange  of  coin  is  what  has  been  called  the 
nominal  exchange.  Gold  is  the  basis  of  the  monetary 
systems  of  both  England  and  the  United  States,  but  the 
dollar  is  the  basis  of  the  latter 's  coinage,  and  the  pound 
of  England's  coinage.  If  one  owed  a  debt  in  England 
he  would  have  to  pay  in  English  money,  as  American  coin 
is  not  legal  tender  there.  So  it  would  be  necessary  for 
him  to  exchange  his  American  dollars  for  English  pounds. 
The  value  of  the  two  coins  in  an  international  transaction 
depends  not  upon  the  Government's  stamp  upon  them, 
but  upon  the  amount  of  gold  in  them.  This  is  deter- 


FOREIGN  EXCHANGE  325 

mined  by  an  assay.  The  equivalent  in  American  money 
of  £1  sterling  is  $4.8666.  But  in  paying  a  debt  in  Eng- 
land the  money  may  have  to  be  transported  there.  This 
involves  cost  of  freight,  insurance  against  loss,  and  other 
items  of  expense. 

State  of  Credits. — The  actual  rate  of  exchange  depends 
not  only  upon  the  difference  in  the  value  of  the  coin,  but 
upon  Mie  state  of  international  credits.  For  the  real  ex- 
change is  the  payment  of  a  debt  by  a  transfer  to  one's 
creditor  of  a  debt  due  from  another  person.  For  in- 
stance, if  A  in  New  York  owes  B  in  London  £5,000,  and 
C,  also  in  London,  owes  A  a  like  amount,  A  liquidates 
his  indebtedness  by  transferring  to  B  his  credit  with  C, 
who  pays  the  money  to  B,  thus  avoiding  two  shipments 
across  the  Atlantic  from  C  to  A  and  from  A  to  B.  Im- 
agine, if  one  can,  a  state  of  things  in  which  every  inter- 
national debt  had  to  be  paid  by  an  actual  transfer  of 
coin.  Half  the  ships  would  be  carrying  merchandise  and 
the  other  half  gold  in  payment  therefor.  The  expense 
and  the  loss  would  be  prodigious.  Commerce,  of  course, 
would  be  impossible,  in  the  modern  sense.  But  by  bills 
of  exchange  this  is  obviated. 

Bills  of  exchange  are  written  orders  drawn  by  one  per- 
son on  another  who  owes  him  money,  generally  for  mer- 
chandise purchased  from  him,  directing  him  to  pay  a 
specified  sum  at  a  specified  time  to  a  specified  person. 
The  form  of  a  bill  of  exchange  is  similar  to  that  of  a 
draft,  the  difference  between  the  two  papers  being  that 
the  draft  is  an  order  generally,  not  on  a  debtor,  but  upon 
a  bank  or  some  other  custodian  of  funds  belonging  to  the 
person  drawing  the  draft.  Bills  of  exchange  are  negotia- 
ble, being  transferable  by  indorsement  the  same  as  drafts 
and  checks,  and  increasing  in  strength  by  every  addi- 
tional indorsement.  They  become,  therefore,  articles  of 
merchandise  like  the  products  whose  sale  produced  them. 


326  WORK  OF  WALL  STREET 

Tiills  of  exchange  are  thus  bought  and  sold  like  wheat  or 
cotton  or  stocks. 

Europe  is  constantly  buying  American  products  and 
American  stocks,  and  as  the  United  States  is  always  pur- 
chasing European  cloths,  wines,  and  other  goods,  there 
is  never  a  time  when  one  country  has  not  debts  to  be  paid 
in  the  other.  There  is  therefore  a  constant  output  of 
bills  of  exchange  and  a  steady  demand  for  them.  'Hence 
has  sprung  up  a  class  of  bankers  who  find  it  profitable  to 
deal  in  these  bills,  buying  from  some  and  selling  to 
others.  The  Chicago  merchant  who  sells  a  cargo  of  grain 
in  England  draws  a  bill  of  exchange  on  the  purchaser  in 
London  and  discounts  or  sells  it  to  a  bank.  The  merchant 
in  Worth  Street  having  purchased  a  line  of  English  cloth 
in  London,  may  buy  a  bill  of  exchange  to  pay  the  debt. 
Some  bills  are  drawn  to  be  paid  at  sight  on  demand,  and 
others  at  sixty  or  ninety  days.  When  made  payable  at 
some  future  date,  the  bill  must  be  presented  at  the 
earliest  possible  time  to  the  person  on  whom  it  is  drawn, 
who  writes  "Accepted"  across  its  face.  Naturally  the 
value  of  a  bill  depends  upon  the  strength  of  the  names 
on  it.  Bankers  also  draw  their  own  bills  on  their  for- 
eign credits  and  sell  these  in  the  market. 

International  Clearing-House. — The  foreign  exchange 
market  is  thus,  as  has  been  before  said,  a  vast  interna- 
tional clearing-house.  The  transactions  of  commerce  are 
cleared  by  this  system  of  transfers  of  credit  just  as  the 
transactions  of  inland  trade  are  cleared  by  the  bank 
clearing-houses.  If  our  indebtedness  abroad  is  heavy, 
there  is  a  big  demand  for  bills  and  the  rate  of  exchange 
advances.  If  the  rate  advances  to  a  certain  point,  how- 
ever, it  may  be  found  cheaper  to  ship  gold  than  to  buy 
the  bills.  If,  on  the  other  hand,  the  balance  of  trade  is 
in  our  favor,  and  the  volume  of  our  European  credits 
is  greater  than  our  debts,  the  supply  of  bills  is  larger 


FOREIGN  EXCHANGE  327 

than  the  demand.  The  rate  therefore  falls,  and  if  it 
falls  far  enough  gold  is  imported. 

"It  might  seem,"  says  Jevons,  in  his  work  on  the 
"Mechanism  of  Exchange,  "that  in  the  use  of  checks 
internally  and  of  bills  of  exchange  externally,  we  have 
reached  the  climax  of  economy  in  metallic  money,  but 
there  is  yet  one  further  step  to  take.  Let  us  imagine 
that  merchants  all  over  the  world  agree  to  keep  their 
principal  accounts  with  the  bankers  of  any  one  great 
commercial  town.  All  their  mutual  transactions  could 
then  be  settled  among  those  bankers.  An  approximation 
to  such  a  state  of  things  exists  in  the  tendency  to  make 
London  the  monetary  headquarters  of  the  commercial 
world  and  the  general  clearing-house  of  international 
transactions." 

As  London  clears  for  the  world,  so  New  York  clears 
for  the  United  States.  The  bankers  of  Wall  Street 
handle  the  machinery  of  exchange  so  as  to  provide  with 
the  utmost  economy  of  time  and  expense  for  the  pay- 
ment of  our  indebtedness  abroad,  for  the  collection  of 
our  foreign  credits,  and  for  the  payment  of  the  expenses 
of  American  tourists  by  means  of  letters  of  credit,  and 
all  the  other  functions  of  international  finance. 

Balances  to  be  Paid. — But,  as  in  the  exchanges  of  a 
clearing-house,  there  is  always  a  balance  to  be  paid. 
For,  of  course,  in  commercial  intercourse  of  nation  with 
nation,  it  can  not  be  supposed  that  their  transactions 
exactly  clear  each  other.  Foreign  exchange  provides  a 
convenient  method  by  which  we  pay  for  foreign  mer- 
chandise with  cotton  and  wheat  and  other  American 
products.  But  these  exchanges  are  not  equal,  and  there 
comes  a  time  when  balances  have  to  be  paid.  These  bal- 
ances are  settled  in  gold.  If  it  is  a  credit  balance  there 
is  gold  to  receive.  If  it  is  a  debit  balance  there  is  gold  to 
pay.  In  clearing-houses  the  balances  are  paid  at  stated 
23 


328  WORK  OF  WALL  STREET 

times,  usually  every  day.  But  in  foreign  exchange  the 
periods  of  payment  are  irregular  and  may  be  long  de- 
ferred. 

When  the  balance  has  to  be  paid  there  is  a  gold  ship- 
ment, for  gold,  not  valued  as  coin  but  as  bullion,  is  the 
only  thing  that  will  be  accepted  in  payment  of  an  inter- 
national balance.  But' the  time  of  payment  is  regulated 
by  various  influences  which  often  appear  very  occult. 
Gold  shipments  are  controlled  by  the  rates  of  exchange, 
but  these  rates  are  controlled  by  the  supply  of  and  de- 
mand for  bills.  This  supply  and  demand  depend  on  the 
state  of  trade  between  the  United  States  and  Europe,  and 
various  other  factors  in  international  finance,  such  as 
foreign  investment  and  foreign  travel. 

Influence  of  Money  Rates. — But  gold  shipments  are 
also  regulated  by  another  powerful  influence,  namely, 
the  rates  for  loans.  Money  always  moves  to  the  point 
where  there  is  the  most  profitable  use  for  it,  where  the 
rates  for  loans — the  matter  of  security  being  equal — are 
highest.  This  is  true  as  between  different  parts  of  this 
nation,  and  it  is  also  true  as  between  different  countries. 
In  one  sense,  there  are  no  boundary  lines  in  finance  as 
there  are  none  in  art.  ,  London,  Paris,  Vienna,  Berlin, 
New  York — the  movement  of  money  between  these  great 
cities  is  controlled  by  laws  quite  distinct  from  the  politi- 
cal and  racial  barriers  that  separate  them.  There  is  no 
tariff  on  credits. 

If  the  rate  of  discount  is  higher  in  London  than  else- 
where, money  is  attracted  there  as  iron  to  a  magnet. 
New  York  may  owe  a  vast  sum  of  money  to  London,  but 
an  advance  in  interest  rates  in  Wall  Street  will  postpone 
the  payment,  for  London  may  find  it  more  profitable  to 
lend  the  money  here  than  to  call  it  home  where  there 
is  less  eager  .demand  for  it.  A  few  years  ago  it  was  said 
that  Berlin  was  lending  money  in  New  York,  the  differ- 


FOREIGN  EXCHANGE  329 

ence  in  the  profit  of  employing  the  money  here  over  that 
of  use  in  Berlin  being  at  that  time  2  per  cent.  In  1911-12 
the  reverse  operation  occurred;  New  York  loaned  vast 
sums  in  Germany.*  Therefore  the  mechanism  of  foreign 
exchanges  includes  within  it  this  system  of  foreign  loans. 
Thus,  an  advance  in  rates  of  money  generally  weakens 
the  rates  of  exchange,  and  a  decline  in  money  strengthens 
the  exchange  market.  In  May,  1902,  to  take  an  illustra- 
tion, the  foreign  exchange  situation  foreshadowed  gold 
shipments  as  the  rates  approached  closely  to  the  usual 
export  point.  But  by  reason  of  the  interior  demand  for 
currency,  and  an  expansion  of  loans  through  speculation 
and  syndicate  operations,  money  became  scarce,  and  the 
rates  advanced  to  10  and  20  per  cent.  Immediately  there 
was  an  avalanche  of  sterling  loans.  Europe  found  it 
more  profitable  to  loan  out  her  credits  in  Wall  Street 
than  to  call  for  payment.  Immediately  rates  of  ex- 
change fell  and  the  stringency  in  money  was  reduced. 
These  foreign  loans  postpone  the  day  of  settlement  of 
balances,  but  as  borrowed  money  must  be  paid  back  some 
time,  there  comes  a  day  when  the  debit  balances  must 

be  settled.     The  creditor  finally  demands  his  money. 

\ 

*  "Because  of  the  much  more  attractive  rates  offered  for  money 
abroad,  the  total  outstanding  advance  made  to  foreign  markets  by 
American  lending  institutions  probably  exceeds  to-day  $150,000,000. 
In  other  words,  the  volume  of  these  credits  created  in  favor  of  our 
banks  on  the  other  side  is  already  at  the  high  level  of  last  year, 
and  if  the  movement  continues,  it  is  fair  to  assume  that  the  figures 
in  the  near  future  will  break  all  records.  Such  a  situation  seems 
to  be  inevitable,  unless  the  expulsion  of  capital  should  be  immedi- 
ately checked.  In  this  way,  the  American  money-market  has  become 
much  the  cheapest  in  the  world,  and  the  situation  here  is  protected 
by  the  fact  that  we  will  be  in  a  position  to  draw  gold  against  this 
huge  foreign  credit  fund,  should  unexpected  need  develop  on  this 
side.  This  is  a  really  extraordinary  situation  and  shows  that  for 
at  least  a  considerable  portion  of  the  present  year  the  foreign 
money-market  will  be  virtually  in  the  hands  of  American  bankers. 
This  is  only  another  instance  of  the  fact  that  money  invariably 
seeks  the  dearest  market,  or  that  which  bids  the  highest  rate." — 
"Fourth  National  Bank  Circular,"  February,  1912. 


330  WORK  OF  WALL  STREET 

Here  we  touch  upon  another  subject  concerning  which 
there  is  much  popular  misconception.  There  is  a  great 
deal  heard  about  the  "balance  of  trade"  as  being  in 
favor  of  one  country  or  another,  and  as  if  that  controlled 
the  movement  of  gold.  If  the  United  States  exports 
more  than  she  imports,  there  is  a  balance  in  her  favor, 
and  if  other  things  were  equal,  there  would  be  an  im- 
portation of  gold.  But  the  exports  and  imports  of  mer- 
chandise constitute  only  one  item  in  the  international 
balance-sheet. 

Balance  of  Trade. — The  balance  of  trade  *  is  a  term 
over  which  economists  have  been  quarreling  for  two  hun- 
dred years,  and  they  are  still  at  it,  for  involved  in  it  is 
the  issue  of  protection  and  free  trade.  J.  B.  Say  says 
that  a  misconception  on  this  subject  was  responsible  for 
fifty  years  of  commercial  wars,  which  were  carried  on 
because  nations  thought  that  the  sole  object  of  commerce 
was  to  acquire  the  precious  metal.  The  profits  of  com- 
merce were  valued  only  as  they  brought  in  gold  and 
silver.  If  one  nation  bought  more  than  it  sold  of  mer- 
chandise, it  had  to  pay  specie  for  the  balance,  and  was 
therefore  said  to  have  lost  wealth,  just  as  the  other  na- 
tion which  had  sold  more  than  it  bought,  had  gained 
wealth.  The  idea  that  neither  side  lost  in  an  exchange  of 
commerce,  but  that  both  sides  gained,  was  overlooked, 
and  everything  was  sacrificed  in  an  endeavor  to  check 
merchandise  imports  and  force  exports. 

While  the  theory  of  the  balance  of  trade  no  longer  con- 
trols the  policies  of  the  nations  to  the  extent  it  once  did, 
it  still  has  a  powerful  sway,  and  to-day  an  exportation  of 

*  "The  term  'trade  balance'  is  generally  used  for  the  purpose  of 
indicating  the  excess  value  of  a  country's  exports  of  merchandise 
over  the  value  of  its  imports  of  merchandise,  or  the  excess  value  of 
a  country's  imports  of  merchandise  over  the  value  of  its  exports 
of  merchandise.  In  monetary  circles  the  term  is  employed  to  de- 
note the  ability  of  a  country  to  import  supplies  of  the  precious 
metals."  GEORGE  PAISH. 


FOREIGN  EXCHANGE  331 

gold  is  regarded  by  multitudes  as  a  national  calamity,  as 
being  a  loss  of  national  wealth.  If  a  man  pays  $20,000 
for  a  house  he  is  no  poorer  than  he  was  before.  He  has 
merely  exchanged  one  article  of  value  for  another  article 
of  value.  And  so  a  shipment  of  gold  is  only  one  of  a 
multitude  of  exchanges  of  products  that  are  going  on 
between  the  people  of  the  different  nations.  Europe  loses 
no  wealth  by  paying  gold  for  American  wheat,  for  though 
gold  perishes  not,  and  wheat  is  consumed,  the  wheat  as 
food  is  transformed  by  the  alchemy  of  the  stomach  into 
that  bodily  and  mental  strength  which  enables  Europe 
not  only  to  live,  but  to  achieve  wealth  in  other  forms. 

In  "Wall  Street,  however,  a  gold  shipment  is  dreaded, 
because  it  decreases  the  loaning  power  of  the  banks,  by 
reducing  their  reserves,  which  regulate  the  amount  of 
their  credit  capacity.  In  this  way  a  gold  shipment  may 
cause  much  injury  to  the  home  market.  As  a  matter  of 
fact  the  great  banks  of  Europe  are  constantly  competing 
for  the  new  gold  which  comes  from  the  mines  as  well 
as  for  the  old  gold  which  may  be  drawn  from  other 
countries  in  payment  of  balances. 

Foreign  Commerce. — But  even  Wall  Street  is  prone  to 
exaggerate  or  misconceive  the  significance  of  the  bal- 
ance of  trade.  In  the  fiscal  year  ending  June  30,  1900, 
the  total  foreign  commerce  of  the  United  States  amounted 
to  $2,244,424,266,  and  if  there  had  been  no  mechanism 
of  exchange,  this  business  would  have  called  for  the 
actual  transfer  between  the  United  States  and  other  coun- 
tries of  that  amount  of  gold,  which  would,  of  course, 
have  been  a  physical  impossibility.  But  by  the  use  of 
bills  of  exchange,  the  great  bulk  of  the  transactions  were 
cleared  one  against  the  other,  so  that  the  amount  of  gold 
actually  required  to  be  exported  and  imported  in  pay- 
ment of  balances  was  only  $92,839,943,  and  this  in  settle- 
ment of  financial  as  well  as  trade  balances.  In  that  year 


332  WORK  OF  WALL  STREET 

the  excess  of  merchandise  exports  over  imports  amounted 
to  $544,541,898.  If  the  movement  of  merchandise  was  all 
that  controlled  the  movement  of  gold,  there  would  have 
been  an  importation  of  just  that  amount  of  gold  into  the 
United  States  which  would  have  produced  a  panic  in 
Europe.  But,  as  a  matter  of  fact,  we  exported  $3,693,- 
575  more  gold  than  we  imported;  in  other  words,  instead 
of  the  rest  of  the  world  being  indebted  to  the  United 
States,  as  the  trade  balance  indicated,  we  were  actually 
in  debt,  and  thus  exported  an  excess  of  gold.  In  the  next 
fiscal  year  of  1901  we  imported  an  excess  of  $12,866,010 
gold,  but  our  trade  balance  favored  us  to  the  amount  of 
$664,592,826.  It  is  therefore  clear  that  the  movement 
of  merchandise  between  this  and  other  countries  consti- 
tutes only  one  of  several  factors  controlling  the  move- 
ment of  gold. 

During  the  five  years  ending  December  31,  1910,  the 
United  States  enjoyed  an  excess  of  merchandise  and 
silver  exports  amounting  to  $2,233,684,213.  In  the  same 
time  it  received  a  balance  of  $77,767,291  gold  imports  in 
excess  of  the  gold  exports.  The  difference  between  these 
two  sums  amounting  to  $2,155,916,922,  represents  invisi- 
ble items  in  foreign  exchange. 

It  is  comparatively  easy  for  an  individual  to  ascertain 
whether  his  credits  exceed  his  debits  or  not,  but  it  is 
often  difficult  to  ascertain  the  true  position  of  a  nation. 
Former  Secretary  Hay  has  been  quoted,  in  another  chap- 
ter, as  declaring  that  in  the  past  five  years  the  United 
States  has  become  a  creditor  nation ;  but  that  was  largely 
a  figure  of  speech,*  an  expression  of  a  belief  in  the  ap- 

*  In  an  address  to  the  Manufacturers'  Association  of  New  York, 
O.  P.  Austin,  Chief  of  the  United  States  Treasury  Bureau  of  Statis- 
tics, said:  "The  fear  that  has  been  expressed  that  the  maintenance 
of  a  large  excess  of  exports  over  imports  would  disastrously  affect 
national  financial  balances  throughout  the  world  has  not  up  to  the 
present  time  been  realized,  and  under  present  conditions  does  not 
seem  likely  to  be  realized.  The  large  favorable  balance  of  trade  ia 


FOREIGN  EXCHANGE  333 

preaching  financial  supremacy  of  the  United  States.  It 
is  noteworthy  that  in  1911,  by  virtue  of  its  heavy  loans 
abroad,  this  country  was,  in  a  sense,  a  large  creditor  of 
Europe.  It  may  seem  strange  that  there  should  be  ob- 
scurity on  so  vital  a  question  as  this,  but  the  fact  is  that 
while  we  have  official  Government  statistics  of  merchan- 
dise, and  specie  exports  and  imports,  there  is  no  certain 
way  of  ascertaining  the  volume  of  other  international 
transactions.  Many  estimates  are  given,  but  they 
are  merely  approximations.  Even  the  Government 
statistics  of  the  value  of  merchandise  imports  report  less 
than  the  actual  value,  because  a  large  though  uncer- 
tain amount  of  imported  goods  is  undervalued,  in 
order  to  escape  payment  of  ad  valorem  duties.  Still,  it 
is  important  for  a  man  of  large  affairs  to  keep  track  as 
best  he  may  of  these  blind  items  in  the  nation's  account 
current  with  the  rest  of  the  world. 

International  Exchanges. — Every  year  the  United 
States,  to  mention  the  leading  items,  has  to  pay  other 
countries : 

1.  For  her  importations  of  their  products. 

2.  The    freight    charges    on   merchandise    carried   in 
foreign  vessels  for  American  account. 

3.  The  interest  and  dividends  on  American  securities 
owned  by  foreigners  or  by  Americans  making  their  homes 
abroad. 

4.  For  securities  sold  by  foreigners  in  our  markets. 


being  redistributed  to  the  world,  partly  by  American  tourists,  partly 
in  payment  of  freights  on  international  commerce,  partly  in  pay- 
ment of  the  earnings  of  foreign  capital  invested  in  the  United  States 
and  interest  on  American  securities  held  abroad,  and  partly  in  the 
liquidation  of  those  securities;  but  until  that  foreign  indebtedness, 
which  is  still  estimated  at  perhaps  $2,000,000,000,  is  cancelled  and 
the  United  States  becomes  a  creditor  instead  of  a  debtor  nation, 
there  seems  no  reason  to  suppose  that  a  continuation  of  a  large 
excess  of  exports  over  imports  will  prove  a  condition  to  be  depre- 
cated." 


334  WORK  OF  WALL  STREET 

5.  The  traveling  expenses  of  American  tourists  in  for- 
eign countries. 

6.  The  remittances  of  foreign  born  citizens  to  rela- 
tives and  friends  abroad. 

Every  year  the  United  States  is  due  to  receive  from 
other  countries: 

1.  The  sums  paid  for  our  agricultural  and  manufac- 
tured products  sold  abroad. 

2.  The  money  brought  by  immigrants. 

3.  The  outlays  of  foreign  vessels  in  our  ports. 

4.  The  traveling  expenses  of  foreign  tourists  in  our 
country. 

5.  The  freight  paid  for  merchandise  in  American  ves- 
sels in  the  foreign  trade. 

6.  The  sums  paid  for  purchase  of  American  securities 
and  other  American  investments. 

While  Europe  is  vastly  our  debtor  in  the  exchange  of 
products,  we  are  vastly  her  debtor  on  all  the  other  items 
of  the  international  balances.  For  instance,  nearly  all 
of  our  commerce  is  carried  by  foreign  vessels.  In  1910, 
only  8.7  per  cent,  of  all  the  imports  and  exports  were 
carried  in  vessels  flying  the  United  States  flag.  There- 
fore we  have  to  pay  other  countries  for  carrying  our 
commerce.  Then,  the  United  States  is  a  nation  of  tour- 
ists. In  the  fiscal  year  of  1910,  1,441,228  passengers  ar- 
rived in  the  United  States  from  other  countries,  but 
243,191  of  these  were  United  States  citizens  returning 
from  travel  abroad;  only  156,467  were  foreign  tourists 
and  business  agents  intending  to  travel  in  the  United 
States;  the  rest,  1,041,570,  were  immigrants.  In  1909 
there  were  244,800  cabin  passengers  departing  from  the 
United  States.  The  amounts  paid  by  Americans  abroad 
are  largely  in  excess  of  the  sums  paid  here  by  foreign 
tourists  and  brought  here  by  immigrants. 

About  twenty  years  ago  William  Dodsworth  made  a 


FOREIGN  EXCHANGE  335 

painstaking  effort  to  arrive  at  a  just  estimate  of  the 
various  unknown  items  in  the  problem  of  the  balance  of 
trade.  He  computed  the  debtor  items  as  follows:  In- 
vestment account,  $90,000,000 ;  traveling  credits,  $47,000,- 
000;  inward  freight  charges  for  American  vessels,  $24,- 
777,000 ;  outward  passenger  fares  per  foreign  steamships, 
$8,698,000 ;  undervaluations  of  imports,  $5,000,000 ;  total, 
$175,475,000.  The  creditor  items  were:  Money  brought 
by  immigrants,  $14,000,000;  outlays  of  foreign  ships  in 
ports,  $8,250,000;  port  outlays  of  passenger  steamships, 
$6,600,000 ;  outward  earnings  of  American  vessels,  $1,900,- 
000;  total,  $29,750,000.  The  debtor  balance  was  $145,- 
725,000,  outside  of  the  movement  of  merchandise  and  of 
securities.  During  the  seven  years  from  1887  to  1893  the 
excess  of  merchandise  and  specie  exports  was  $524,000,- 
000;  and  the  debtor  balance  on  the  other  items  was  $1,- 
015,000,000,  leaving  a  debtor  balance  of  $491,000,000, 
which  was  presumably  settled  by  transmission  of  se- 
curities. 

This  indicates  the  method  of  computing  the  invisible 
items  in  international  exchange,  but  the  estimate  itself 
needs  of  course  to  be  corrected  by  more  recent  figures. 

George  Paish,  editor  of  the  London  Statist,  in  an 
article  published  in  1910,  estimated  that  the  United  States 
pays  other  countries  in  interest  upon  foreign  capital  in- 
vested here  $250,000,000  net;  in  expenses  of  American 
travelers  abroad  over  expenses  of  foreign  travelers  in 
this  country,  $170,000,000;  in  remittances  to  friends  in 
Europe,  $150,000,000;  and  in  ocean  freights  $25,000,000. 
Thus,  according  to  this  estimate,  the  United  States  has 
a  balance  of  nearly  $600,000,000 'which  must  be  paid  for 
either  in  gold,  or  in  excess  merchandise  exports.  It  has 
been  shown  that  the  invisible  items  of  foreign  exchange 
in  five  years  (1906-1910)  amounted  to  $2,155,916,922, 
which  is  an  average  of  about  $431,000,000,  so  that  allow- 


336  WORK  OF  WALL  STREET 

ing  for  deferred  payments  (through  loans)  and  other 
occult  items,  Mr.  Paish's  estimate  is  undoubtedly  ap- 
proximately correct. 

Gold  Shipments. — Enough  has  been  written  to  indicate 
the  laws  that  control  the  movement  of  gold  in  settle- 
ments of  international  balances.  The  gold,  however,  is 
not  always  shipped  directly  to  the  country  to  which  we 
owe  it.  For  instance,  we  may  be  indebted  to  Germany, 
but  ship  to  France,  because  Germany  owes  a  balance  to 
that  country,  and  a  shipment  to  France  thus  satisfies  two 
debts  at  once.  Or  we  may  owe  England,  but  ship  to 
France,  because  England  is  willing  to  lend  the  money 
there.  Thus  we  hear  of  a  "triangular  transaction"  in 
exchange,  which  is  a  movement  involving  three  countries. 

The  shipper  of  gold  has  a  comparatively  simple  prob- 
lem to  solve.  He  treats  gold  as  an  article  of  merchan- 
dise. He  ascertains  what  it  costs  him  in  New  York ;  what 
will  be  the  expense  of  packing,  of  carting  to  the  steam- 
ship wharf,  of  transporting  to  Europe,  of  insuring  against 
loss ;  what  will  be  the  loss  of  interest  in  transit,  etc. ;  and 
then  he  ascertains  what  he  can  sell  the  gold  for  in  London 
or  Paris,  as  the  case  may  be.  If  there  is  a  profit,  the 
gold  is  shipped.  A  profit  of  $200  on  a  shipment  of  $1,- 
000,000  has  been  said  to  influence  a  shipment.  Some- 
times, when  there  is  not  a  legitimate  profit  in  gold  ex- 
ports, they  may  be  forced  by  an  offer  of  some  premium 
or  extra  inducement,  for,  as  has  been  indicated,  gold 
moves  to  the  point  where  it  is  most  wanted.  Of  course, 
the  same  rules  that  regulate  gold  exports  apply  to  gold 
imports. 

One  of  the  largest  shippers  of  gold  furnished  the  au- 
thor with  a  statement  of  the  method  of  calculating  the 
profit  or  otherwise  of  a  shipment  to  Paris. 

If  foreign  exchange,  he  says,  rises  to  a  certain  point, 
it  becomes  more  profitable  to  remit  gold  (which  has  a 
fixed  price  in  most  of  the  principal  countries)  to  meet 


FOREIGN  EXCHANGE  337 

obligations  than  to  remit  exchange.  On  the  other  hand, 
if  exchange  declines  to  a  certain  point,  it  may  become 
preferable  to  import  gold  than  to  draw  exchange 
against  credit  balances  abroad.  Taking  for  example  a 
gold  shipment  to  Paris,  it  has  to  be  taken  into  calculation 
that  the  Bank  of  France  pays  3,437  francs  for  1  kilo  fine 
gold,  and  that  the  United  States  Assay  Office  sells  bar 
gold  at  the  price  of  $20.67183  per  ounce  fine  plus  40  cents 
per  $1,000  premium.  As  1  ounce  is  equal  to  31.1035 
grammes,  $1  bar  gold  would  bring  in  Paris  5.16936 
francs.  Deducting  about  $2  per  $1,000  expenses,  the  net 
receipt  in  Paris  for  $1  bar  gold  would  be  about  5.1590 
francs.  It  therefore  results  that  if  exchange  in  New 
York  is  such  that  less  than  5.1590  francs  can  be  obtained 
for  $1,  it  is  cheaper  to  ship  gold  than  to  remit  exchange. 
This  is  of  value  as  being  the  calculation  of  a  practical 
man  trained  in  foreign  exchange,  and  not  of  a  mere  theo- 
rist. Formerly  most  of  the  gold  exported  was  in  coin, 
which  was  transported  in  bags.*  But  considerable  value 

*  The  following  calculation  of  a  gold  shipment  to  London  based 
on  coin  (American  eagles)  is  taken  from  The  Journal  of  Commerce 
and  Commercial  Bulletin  in  1902 : 

"An  American  eagle  weighs  258  grains  or  .5375  oz.  troy.  In 
$1,000,000  worth  of  eagles,  therefore,  of  exactly  full  weight,  there 
would  be  53,750  ozs.  The  Bank  of  England  will  buy  American  eagles 
at  a  fixed  rate  of  76s.  4^d.  per  oz.  (sometimes  a  little  more).  At 
that  rate  53,750  ozs.  of  eagles  (allowing  nothing  for  abrasion) 
would  yield  £205,201.  The  charges  on  a  shipment  of  gold  to  Lon- 
don vary  with  eaqh  shipper  and  these  are  trade  secrets  which  are 
jealously  guarded.  In  a  rough  way,  however,  it  costs  about  $3,000, 
or  £600,  to  ship  $1,000,000  gold  to'  London.  The  following  formula 
shows  roughly  the  result  of  a  shipment  of  $1,000,000  of  eagles  of 
exactly  full  weight: 
"$1,000,000—53,750  ozs.— which  yield £205,201 

Charges — 

Freight,    %2  of  1  per  cent £317 

Insurance,   y22    of  1  per  cent 93 

Interest,  10  days,  at  say  3  per  cent 171 

Cartage,  cooperage,  say  $100,  or 20 

Total  .,  ..£601—      601 


Net  yield   of   shipment $204,600 

'A  shipment  of  $1,000,000  eagles  on  the  above  basis,   then,  will 


338  WORK  OF  WALL  STREET 

•was  lost  by  abrasion,  and  an  allowance  had  to  be  made 
for  this  in  all  calculations.  For  a  number  of  years  the 
United  States  would  not  sell  the  gold  in  bars,  but  now 
supplies  bars  at  the  Assay  Office  at  a  slight  premium.  The 
shipper  packs  them  in  the  rear  court  of  the  Assay  Office 
in  casks,  with  sawdust  to  prevent  abrasion. 

Sterling  Loans. — Sterling  loans  are  loans  made  on  bills 
of  exchange. 

The  object  of  making  sterling  loans  is  to  obtain  money 
on  time  at  a  cheaper  rate  than  the  one  ruling  in  the  do- 
mestic market.  The  modus  operandi  is  as  follows: 

The  banker  draws  sixty-  or  ninety-days  sight  bills  on 
London,  which  he  either  hands  over  to  the  borrower,  in- 
dorsed in  blank,  who  then  sells  them  in  the  market,  or  he 
himself  sells  them  in  the  market  on  behalf  of  the  bor- 
rower, to  whom  he  delivers  the  proceeds.  After  the  lapse 
of  sixty  or  ninety  days  the  borrower  has  to  repay  to  the 

realize  £204,600  net.  This  means  that  every  pound  sterling  costs 
(1,000,000  divided  by  204,600)  $4.8875.  If  this  were  all  the  story, 
then,  so  long  as  demand  sterling  could  be  bought  at  less  than  $4.8875, 
there  would  be  no  inducement  to  ship  gold. 

"But  owing  to  the  so-called  'triangular'  operation,  or  to  special 
concessions  offered  by  the  receiver  of  the  gold,  it  is  often  practicable 
to  ship  gold  to  Europe  when  demand  sterling  is  selling  below  $4.8875, 
or  even  below  $4.88." 


The  following  is  taken  from  the  Wall  Street  Journal  of  Sept. 
13,  1905: 

"The  price  of  bar  gold  11-12  fine  in  the  London  market  at  present 
is  77s.  9|d.  per  ounce.  The  mint  price  of  coined*  sovereigns  is  77s. 
lOJd.  per  ounce.  There  is  no  coinage  charge  in  the  United  States 
so  that  the  difference  of  IJd.  between  the  open  market  price  of 
British  standard  gold  bars  amounts  to  about  2.72  cents  profit  on 
the  ounce  of  fine  gold  purchased  in  London  and  sold  at  the  New 
York  assay  office.  In  a  million  dollars  there  are  48.377  ounces  fine 
gold  and  at  2.72  cents  per  ounce  the  profit  would  be  $1.315.  The 
difference  between  4.85,  the  price  at  which  demand  sterling  sold 
early  on  Tuesday,  and  the  par  of  exchange,  4.8665,  is  1.65  cents  per 
pound  sterling.  Taking  for  convenience  £200,000  as  the  equivalent 
of  $1,000,000  the  difference  is  $3,300.  Add  to  this  the  profit  on 
the  gold,  $1.315,  we  have  $4.615  as  the  gross  profit.  From  this  is 
to  be  deducted  the  expense  of  importing  the  gold  which  varies  from 
3-16  to  g  of  1%,  or  on  a  million  dollars  from  $1.875  to  $3.780." 


FOREIGN  EXCHANGE  339 

banker  the  loan  at  the  current  rate  of  sterling  exchange. 
If  the  borrower  wishes  to  calculate  what  rate  of  interest 
the  money  will  cost  him,  he  has  to  figure  as  follows.  As 
an  example  we  will 'take  a  sterling  loan  of  £10,000  for 
ninety  days: 


If  the  rate  of  exchange  obtained  for  the  bills  was  484 
(for  £1)  net,  i.e.,  free  of  brokerage  and  revenue 
stamp,  the  borrower  would  receive  $48,400 

Of  this  he  has  to  pay  the  banker  say  \  per  cent,  com- 
mission    242 


Making  the  net  proceeds   $48,158 

If  the  rate  of  exchange  at  which  the  borrower  has  to 
repay  the  banker  were  486^,  he  would  have  to  pay 
$48,650  for  the  original  loan  of  $48,158,  so  that  the  result 
is  that  he  pays  for  interest  $492,  which  is  equal  to  4  per 
cent,  per  annum. 

REFERENCES 

"The  A.  B.  C.  of  Foreign  Exchanges,"  George  Clare,  1893. 
"Money  and  the  Mechanism   of   Exchange,"   W.   Stanley  Jevons, 

1876. 

"Bullion  and  Foreign  Exchanges,"  Ernest  Seyd,  1868. 
"Commentaries  on  the  Law  of  Bills  of  Exchange,"  Joseph  Story, 

1853. 
"International   Exchange,   Its   Terms,   Operation   and   Scope,"   A. 

W.  Margraff. 
"Foreign  Exchange,"  Franklin  Escher,  1910. 


CHAPTER  XXIII 

PRIVATE  BANKERS  AND  UNDERWRITING  SYNDICATES 

The  great  bankers  are  the  great  leaders  in  commerce 
and  industry.  They  are  to-day  the  world's  constructive 
statesmen.  The  best  brains  developed  in  the  last  half 
century  have  gone  not  into  war,  or  politics  or  law,  but 
into  business,  and  the  broadest  of  all  business,  because 
comprehending  every  other,  is  that  of  banking. 

It  has  been  said  that  no  European  nation  could  go  to 
war  without  first  consulting  the  Rothschilds,  so  depend- 
ent are  all  governments  on  the  money  power  in  times  of 
national  crises,  when  the  ordinary  revenues  are  insuf- 
ficient and  extraordinary  loans  are  required.  The  bank- 
ers then  are  called  upon  to  supply  the  "sinews  of  war." 

When  we  speak  in  Wall  Street  of  the  "private  bank- 
ers," we  refer  to  the  handful  of  great  banking-houses 
whose  operations  are  on  an  international  scale,  and  which 
in  the  United  States  represent  the  same  power  that  the 
Rothschilds  have  so  long  possessed  in  Europe.  These 
houses  may,  like  J.  P.  Morgan  &  Co.,  Kuhn,  Loeb  &  Co., 
J.  &  W.  Seligman  &  Co.,  Speyer  &  Co.,  and  Brown  Bros. 
&  Co.,  be  closely  allied  by  partnership  ties  to  other  power- 
ful firms  in  other  cities;  and  represent  here  the  great 
firms  and  institutions  of  Europe,  just  as  August  Bel- 
mont  &  Co.  have  long  represented  the  Rothschilds. 

Function. — The  private  bankers  transact  a  general 
banking  business  much  the  same  as  the  incorporated 
banks  do,  but  free  from  many  of  their  limitations.  They 
make  call  and  time  loans,  buy  and  sell  mercantile  paper, 
and  engage  extensively  in  all  foreign  exchange  opera- 

340 


PRIVATE  BANKERS  341 

tions.  They  act  as  fiscal  agents  for  corporations  and 
associations.  They  are  dealers  in  investment  securities. 
They  often  conduct  important  operations  in  the  stock- 
market.  They  underwrite  new  issues  of  stocks  and  bonds 
for  railroad  and  other  corporations.  They  undertake 
the  reorganization  of  insolvent  or  embarrassed  railroads. 
Of  recent  years  they  have  been  especially  prominent  in 
the  promotion  of  immense  industrial  companies.  They 
are  at  once  bankers,  brokers,  dealers  in  foreign  exchange, 
promoters,  organizers,  and  underwriters.  Their  methods 
of  business  differ  little,  if  any,  from  those  already  de- 
scribed. The  main  difference  lies  in  the  scope  and  mag- 
nitude .of  their  transactions,  which  are  steadily  expand- 
ing. The  deposits  and  corporate  connections  of  two  or 
three  of  these  private  banking  houses  make  them  take 
rank  with  the  most  powerful  banking  institutions  in  the 
world. 

Field  of  Operations. — Their  field  of  operations  is,  in- 
deed, as  wide  as  the  world.  Their  business  in  London 
and  Paris  and  Berlin  almost  as  much  as  it  is  in  New 
York.  This  is  especially  true  in  recent  years,  when  the 
expanding  commerce  and  financial  power  of  the  United 
States  have  placed  the  country  in  the  company  of  the 
world's  "great  powers,"  a  competitor  of  Great  Britain 
and  Germany,  and  a  factor  in  the  now  pressing  problem 
of  the  Orient.  The  private  bankers  are  intimately  con- 
nected with  and  influential  in  the  railroad  and  the  big  in- 
dustrial corporations  which  engage  in  the  principal 
branches  of  trade.  When  it  is  said  that  one  bank- 
ing-house in  Wall  Street  is  influential  in  the  management 
of  railroads  having  one-fourth  of  the  entire  railroad  mile- 
age of  the  United  States;  that  it  is  a  powerful  factor  in 
the  Boards  of  Directors  of  the  greatest  banks  and  trust 
and  insurance  companies;  that  it  is  one  of  the  directing 
forces  in  the  coal  and  iron  trade,  and  has  close  alliances 


342  WORK  OF  WALL  STREET 

with  leading  corporations  in  copper,  express,  and  elec- 
tric light ;  and  that  the  par  value  of  the  securities  of  the 
various  companies  with  which  it  is  identified  in  one  way 
or  another  is  nearly  one-third  of  all  the  securities  dealt  in 
in  the  New  York  Stock  Exchange,  some  idea  is  formed 
of  the  magnitude  of  the  operations  and  the  extent  of  the 
influence  of  the  private  bankers  of  Wall  Street.  Whether 
such  power  as  this  is  good  or  bad,  depends  upon  the 
manner  in  which  it  has  been  acquired  and  in  which  it 
is  administered;  and  while  power  always  arouses  violent 
jealousy  and  opposition,  yet  it  is  the  judgment  of  every- 
one who  has  made  a  close  study  of  the  Wall  Street  sys- 
tem, that  not  only  has  the  growth  of  the  private  banking 
houses  been  a  legitimate  evolution  in  finance  and  com- 
merce, but  that  it  has  transgressed  no  laws  of  State  or 
economics;  and  while  it  has  been  a  power  exercised  for 
private  profit,  it  has  also  been  exercised  for  the  public 
benefit.  Even  their  latest  critic  admits  that  "they  have 
exercised  the  power  with  exceptional  justice  and  self- 
restraint." 

Mr.  Morgan  is  the  only  man  in  the  world  thus  far 
to  deal  in  billions  of  dollars,  as  he  himself  may  fairly  be 
said  to  be  the  greatest  personal  product  of  the  Street. 
His  unquestioned  leadership  in  American  business  has 
been  achieved  by  his  wonderful  force  of  character  and 
brilliant  judgment.  Mr.  Morgan's  own  account  of  the 
business  of  the  private  banker  is  therefore  of  supreme  in- 
terest, it  being  the  account  of  an  expert.  In  his  testimony 
of  March,  1902,  before  the  special  examiner  in  the  suit 
against  the  Northern  Securities  Company,  the  following 
dialogue  *  took  place  between  him  and  the  lawyer  ex- 
amining him: 

Q.  You  are  J.  P.  Morgan,  senior  member  of  the  firm  of  J.  P. 
Morgan  &  Company?  A.  Yes. 

*  Report  of  testimony   in  the  New   York  Tribune. 


PRIVATE  BANKERS  343 

Q.  Would  you  mind  telling  us  the  nature  of  the  transactions 
of  J.  P.  Morgan  &  Company?  A.  We  deal  in  railroad  securities 
and  other  securities  and  adjustments — anything  in  the  financial 
line"  that  is  creditable  and  might  suggest  itself  to  the  firm  as 
profitable. 

Q.  Does  the  firm  ever  engage  in  any  speculation  on  its  own  ac- 
count? A.  Not  to  any  extent. 

Q.  They  would  not,  for  instance,  purchase  $78,000,000  of  stock 
of  a  railroad  for  their  own  account?  A.  Probably  not.  We 
might  if  we  thought  it  desirable. 

Q.  Their  business  is  to  deal  in  stocks  and  other  securities  for 
the  benefit  of  their  customers?  A.  Yes. 

Q.  And  then  by  financing  any  good  enterprises  that  might  pre- 
sent themselves?  A.  If  they  wished  to  do  that. 

Q.  And  they  would,  for  instance,  loan  money  for  that  purpose? 
A.  Yes. 

Q.  For  their  own  account  or  the  account  of  others?  A.  I  don't 
feel  that  I  ought  to  be  called  on  to  answer  that  question. 

Q.  The  relations  of  your  firm  as  bankers  to  the  Northern  Pa- 
cific have  continued  since  1896?  A.  Yes,  we  have  been  their  fis- 
cal agents. 

Q.  To  save  time,  tell  us  what  that  means — what  you  did  for 
them.  A.  Whatever  they  required  in  a  financial  way. 

Q.  You  mean  to  say  that  all  their  financial  business  was  con- 
ducted through  your  house?  A.  No,  we  were  their  New  York 
representatives,  and  we  are  to-day. 

Q.  So  that  if  the  Northern  Pacific  issued  any  new  stock  since 
that  time  it  would  be  financed  through  your  house?  A.  It  would. 
At  least,  I  should  expect  it. 

Q.  And  if  it  was  necessary  to  raise  money  for  the  building  of 
extensions  and  improvements,  or  for  the  purchase  of  large  lines, 
these  transactions  would  probably  be  financed  through  your 
house?  A.  I  would  expect  them  to  be. 

Q.  Of  course,  the  detailed  financial  matters  of  the  road  would 
be  handled  by  others?  A.  Of  course. 

Q.  But  all  these  large  matters  would  be  handled  by  your 
house?  A.  I  should  so  expect  them  to  be. 

Q.  And  the  Northern  Pacific  has  from  time  to  time  paid  for 
this  service?  A.  I  think  so. 

Q.  Every  time  an  underwriter's  syndicate  is  formed  there  is 
a  commission  paid  to  the  banker  and  some  profit  to  the  under- 
derwriter?    A.  Not  always.     (Laughter.) 
24 


344  WORK  OF  WALL  STREET 

Q.  That  is  the  usual  custom?  A.  We  should  expect  it  to  be. 
Otherwise  the  transaction  would  not  be  made. 

Q.  You  would  expect  to  be  paid  for  your  services?  A.  Not  al- 
ways. 

Q.  When  you  negotiate  for  a  railroad  don't  you  make  it  pay 
you?  A.  Not  always. 

Q.  You  sometimes  do  it  without  any  consideration?  A.  We 
do.  It  may  not  be  desirable  to  make  a  charge.  It  depends  on 
the  nature  of  the  transaction.  In  a  great  many  cases  no  charge 
whatever  is  made. 

Q.  You  do  that  work  for  nothing?    A.  We  do  it  for  nothing. 

The  international  banking-houses  touch  business  at 
every  possible  point  of  contact.  They  may  settle  rate 
wars  and  labor  strikes.  They  shape,  subject  to  the  same 
natural  laws  which  govern  all  human  beings,  the  des- 
tinies of  the  markets.  When  two  of  the  great  banking- 
houses  clash,  the  result  is  like  the  eruption  of  Mont  Pelee 
or  a  collision  between  two  planets.  Such  a  clash  shook 
Wall  Street  from  top  to  bottom  in  the  memorable  panic 
of  May,  1901.  Upon  the  consummate  ability  and  in- 
tegrity of  these  bankers  depend  in  large  measure  the 
growth,  the  stability,  the  prosperity,  and  the  happiness 
of  the  country.  Before  them  we  stand  in  the  presence  of 
what  is  called  "high  finance."  On  important  occasions, 
when  a  public  statement  is  expected  from  J.  P.  Morgan 
&  Company,  a  throng  of  brokers  and  reporters  gather 
around  the  doors  of  the  firm,  anxious  to  get  the  earliest 
possible  information.  A  meeting  of  the  Cabinet  at  Wash- 
ington does  not  excite  more  interest  than  a  "conference 
at  Morgan's." 

Underwriting. — There  is  one  special  function  of  the 
private  bankers  which  needs  explanation.  They  under- 
write new  issues  of  securities  either  by  established  cor- 
porations or  by  newly  organized  companies.  To  under- 
write is  to  insure.  A  company  desires  to  raise,  say,  $50,- 
000,000,  and  to  do  this,  issues  bonds  secured  by  a  mortgage 


PRIVATE  BANKERS  345 

on  its  property.  It  possesses  no  facilities  for  selling 
these  bonds  to  the  public.  It  must  place  the  bonds,  or 
float  the  loan,  as  the  phrase  is,  through  a  banking-house, 
which  either  underwrites  the  issue  itself  or,  if  it  is  too 
large  for  its  own  resources,  forms  an  underwriting  syndi- 
cate. A  syndicate  is  a  combination  of  capitalists  united 
for  the  purpose  of  prosecuting  an  enterprise  requiring 
a  large  amount  of  money.  The  underwriters  agree  to 
take  the  entire  issue  of  securities;  that  is  to  say,  they 
insure  it,  being  prepared  to  pay  for  every  bond  that  is 
not  sold  to  the  public. 

It  is  scarcely  necessary  to  say  that  this  is  an  operation 
often  involving  great  risks.  The  underwriters  must  be 
men  of  large  capital,  extensive  resources,  wide  and  in- 
fluential connections,  and  thorough  understanding  of  the 
markets. 

Nothing  is  more  important  in  issuing  new  securities 
than  to  know  when  is  the  best  time  to  issue  them.  If  the 
market  is  flooded  with  new  securities,  if  there  has  been 
an  overproduction  of  stocks  and  bonds,  if  the  demand  is 
sluggish  and  prices  are  declining,  the  time  is  unpropitious 
for  a  new  issue.  It  has  been  said  that  only  once  in  a 
generation  would  a  combination  of  conditions  exist  favor- 
able to  such  a  stupendous  enterprise  as  the  organization 
of  the  United  States  Steel  Corporation. 

Numerous  underwriting  syndicates  are  formed  com- 
posed of  weak  material,  and  managed  by  adventurers  in 
finance  who  have  little  to  lose  and  much  to  gain.  These 
are  generally  unable  to  carry  the  enterprises  they  have 
undertaken  to  insure,  and  the  result  is  a  crash  in  which 
many  innocent  victims  suffer. 

Allusion  has  been  made  to  the  United  States  Steel  Cor- 
poration. A  syndicate  was  formed  to  underwrite  this. 
It  was  estimated  that  it  might  require  $200,000,000  to 
float  the  huge  company.  The  syndicate  pledged  itself 


346  WORK  OF  WALL  STREET 

to  furnish  that  sum.  A  first  installment  of  $25,000,000 
was  called,  and  paid  in  to  the  managers  of  the  syndicate. 
No  official  statement  is  made  to  the  public  of  such  opera- 
tions. They  are  considered  private  business,  and  even 
subscribers  to  a  syndicate  may  know  little  about  its  af- 
faire beyond  the  fact  that  they  put  in  so  much  money 
and  draw  out  so  much  profit.  But  it  has  been  announced 
that  in  the  case  of  the  Steel  syndicate  it  was  so  success- 
ful that  not  only  was  $25,000,000  all  that  was  necessary 
to  be  paid  in  of  the  $200,000,000  pledged,  but  that  this 
siim  was  paid  back  to  the  subscribers  in  addition  to 
many  millions  of  dollars  in  profits. 

Great  as  are  the  profits,  they  are  generally  no  greater 
than  the  risks  involved.  The  United  States  Steel  Cor- 
poration at  one  time  determined  to  retire  $200,000,000 
of  preferred  stock  and  issue  $250,000,000  of  bonds  in  its 
place.  It  was  announced  that  the  underwriting  syndi- 
cate would  guarantee  $100,000,000  for  this  operation  and 
receive  4  per  cent,  commission  on  the  amount  of  the 
bonds  actually  placed.  The  syndicate  would  thus  have 
a  prospective  profit  of  $10,000,000  if  the  entire  issue 
should  be  sold,  and  one-fourth  of  this,  or  $2,500,000, 
would  go  to  the  banking-house  managing  the  syndicate. 

The  general  rule  governing  the  underwriting  of  new 
securities  is  that  the  syndicates  shall  receive  a  commis- 
sion of  5  per  cent,  on  the  value  of  the  securities  under- 
written. Let  us  return  to  the  illustration  of  a  railroad 
issuing  $50,000,000  of  bonds.  The  railroad,  it  may  be 
presumed,  is  of  good  standing,  and  the  security  excellent. 
The  company  prefers,  instead  of  securing  a  high  premium 
on  the  bond,  to  save  in  the  annual  interest  charges.  So 
it  issues  a  3£  per  cent,  bond,  with  the  possibility  that  it 
will  sell  at  par  or  perhaps  higher.  The  underwriters 
agree  to  take  the  entire  issue,  say  at  98,  but  it  charges 
a  commission  of  5  per  cent.,  or  about  $2,500,000,  for  the 


PRIVATE  BANKERS  347 

labor,  expense,  and  risk  attending  the  operation.  The 
railroad  is  now  secure.  It  is  assured  of  the  money  it 
needs,  for  which  it  has,  indeed,  paid  a  liberal  discount, 
but  no  more  liberal  proportionately  than  would  be  re- 
quired in  procuring  a  modest  loan  in  the  ordinary  market 
channels.  The  syndicate  must  now  sell  the  bonds.  If 
there  is  an  active  investment  demand  it  may  be  able  to 
accomplish  this  at  once,  at  a  considerable  advance  over 
the  underwritten  price  of  98.  Suppose  it  sells  at  102,  the 
syndicate  would  then  reap  a  profit  of  4  per  cent.,  or 
$2,000,000  in  addition  to  the  commission  of  $2,500,000, 
less,  however,  the  cost  of  advertising,  wages,  attorneys' 
fees,  and  other  expenses.  But  if  the  demand  was  not 
as  great  as  had  been  anticipated,  the  syndicate  might 
find  itself  with  millions  of  dollars  securities  on  its 
hands,  for  which  it  must  pay,  but  for  which  there  is  no 
adequate  market.  The  big  private  banker  has,  however, 
in  his  connections  with  banks  and  corporations  and  bond 
houses  such  facilities  for  disposing  of  securities  that  the 
success  of  a  new  loan  is  practically  assured  as  soon  as  he 
has  taken  hold  of  it. 

In  large  operations  the  underwriting  syndicate  often 
forms  a  subsyndicate,  or  practically  a  blind  pool,  the 
members  of  which  take  a  certain  part  of  the  risk  in- 
volved, with  a  right  to  a  proportionate  share  in  the  profit, 
less  a  usual  commission  of  5  per  cent,  to  the  managers. 
It  is  through  some  such  arrangements  as  these  that  great 
companies  are  formed,  big  loans  floated,  reorganizations 
and  consolidations  effected,  and  immense  enterprises 
made  possible. 

There  has  been  much  said  in  criticism  of  the  sums  paid 
to  bankers  and  syndicates  as  commissions  for  the  market- 
ing of  securities  for  corporations.  But  the  risk  is  often 
as  great  as  the  possible  profit,  and  in  other  cases  where 
there  is  a  minimum  of  risk,  coupled  with  a  maximum  of 


348  WORK  OF  WALL  STREET 

profit,  the  charge  made  by  the  banker  corresponds  in  a 
measure  to  the  fee  of  the  great  specialist  in  surgery,  who 
may  charge  $5,000  for  an  operation  taking  only  five 
minutes  and  involving  no  special  labor  to  himself.  But 
the  patient  pays  not  for  the  time  and  labor  of  the 
surgeon,  but  for  his  years  of  training  and  superior  skill 
and  knowledge.  So  in  finance ;  if  the  corporation  desires 
the  services  of  the  great  specialist,  it  must  be  willing  to 
pay  the  price  demanded. 

In  some  cases  the  underwriting  syndicate  is  paid 
wholly  in  stock ;  for  instance,  in  the  underwriting  of  the 
securities  of  a  big  company  organized  some  years  ago 
it  was  reported  that  the  syndicate  would  receive  in  stock 
an  amount  equal  to  55  per  cent,  of  $50,000,000  of  bonds 
it  would  guarantee. 

In  nearly  all  syndicate  operations,  especially  when  the 
formation  of  a  new  company,  or  the  reorganization  of  an 
old  one,  is  involved,  the  services  of  a  legal  adviser  are 
required.  The  corporation  lawyer  is  thus  one  of  the 
important  adjuncts  of  a  private  banking-house,  and 
sometimes  he  is  even  made  one  of  the  partners. 


CHAPTER  XXIV 

PANICS 

Born  in  a  boom  and  cradled  in  a  panic,  the  history  of 
the  stock-market  has  been  that  of  an  alternation  of 
booms  and  panics.  The  order  of  events  is  this :  There  is 
first  a  period  of  prosperity  in  business,  based  on  good 
crops  and  a  sound  condition  of  the  markets.  Confidence 
prevails,  credit  is  excellent,  manufactures  flourish,  new 
enterprises  are  encouraged,  expansion  sets  in.  This  in- 
duces an  active  speculation.  The  people  are  prosperous, 
and  they  are  led  to  invest  a  part  of  their  surplus  earnings 
in  stocks.  The  public  takes  possession  of  Wall  Street. 
The  volume  of  Stock  Exchange  transactions  increases. 
Prices  advance  by  leaps  and  bounds.  New  issues  of  se- 
curities are  absorbed  quickly.  There  seems  to  be  no 
limit  to  the  upward  movement.  Then  overspeculation 
and  its  attendant  evils  follow.  Credit  is  unduly  ex- 
panded. Recklessness  and  dishonesty  corrupt  the  mar- 
kets. Suddenly  some  event  unforeseen,  except,  it  may  be, 
by  the  most  experienced  eyes,  takes  place.  It  comes  in 
the  form  of  a  calamity.  It  strikes  the  stock-market 
when  its  resources  are  expanded  to  the  utmost.  The  in- 
flated values  collapse  like  a  punctured  balloon.  Panic 
seizes  the  Street.  Credit  is  withdrawn.  Money  is 
hoarded.  The  banks  contract  their  loans,  forced  liquida- 
tion sets  in,  weak  houses  are  driven  to  the  wall,  failures 
are  announced,  general  bankruptcy  is  threatened,  the 
Clearing-House  is  obliged  to  issue  loan  certificates  for 
the  protection  of  solvent  firms  temporarily  embarrassed, 

349 


850  WORK  OF  WALL  STREET 

mills  and  factories  close  their  doors,  thousands  of  la- 
borers are  thrown  out  of  work,  and  distress  is  universal. 
After  this  follows  a  long  period  of  stagnation,  from  which 
the  country  and  the  Street,  slowly  and  painfully,  emerge 
into  a  new  era  of  good  times. 

Definitions. — A  boom  is  a  prolonged  bull  movement.  A 
panic  is  a  convulsion  in  the  markets,  causing  a  contrac- 
tion of  credits,  a  collapse  in  prices  and  failures  in  busi- 
ness. A  distinction,  however,  needs  to  be  made  here. 
The  word  panic  is  overworked  like  many  other  words. 
It  is  commonly  used  to  describe  two  very  different  things. 
Thus,  we  speak  of  the  panic  of  1893,  and  of  the  Venezue- 
lan panic  of  December  19,  1895.  But  the  former  was  a 
prolonged  commercial  crisis,  involving  the  business  of 
the  whole  country,  the  baleful  effects  of  which  were  felt 
for  years.  The  latter  was  a  sudden  paroxysm  of  fear, 
involving  a  crash  in  the  stock-market,  but  scarcely  felt 
outside  of  Wall  Street,  and  which  lasted  only  a  day  or 
two.  Prof.  W.  G.  Sumner  speaks  of  a  panic  as  "a  wave 
of  emotion,  apprehension,  and  alarm  which  is  more  or 
less  irrational."  Such  was  the  Venezuelan  panic.  It 
was  produced  by  fear  of  war  with  England.  The  fear 
was  caused  by  a  sentence  in  President  Cleveland's  mes- 
sage. The  war  never  broke  out  and  the  fear  of  it  passed 
quickly  away. 

Nine  Crises. — There  have  been  nine  commercial  crises, 
involving  practically  the  whole  country,  since  1812,  or  an 
average  of  one  every  eleven  years,*  so  that  in  the  past 
hundred  years  there  have  been  alternating  periods  of 
financial  distress  and  financial  prosperity,  each  period 
averaging  about  five  and  a  half  years.  But  in  addition 
to  these  great  financial  crises  there  have  been  many 

*  Which  coincides  closely  to  the  estimate  made  long  ago  by 
Jevons. 


PANICS  351 

panics  and  semi-panics,  most  of  them  confined  to  Wall 
Street,  but  felt  with  severity  there. 

Using  the  word  panic,  however,  in  its  common  meaning 
as  applying  to  both  kinds  of  monetary  convulsions,  the 
national  and  the  local,  the  commercial  and  the  specula- 
tive, it  may  be  instructive  to  enumerate  briefly  these 
successive  shocks  to  business. 

Phenomena  of  Credit. — There  have  been  periods  of 
business  depression  such  as  are  produced  by  crop  fail- 
ures, wars  or  other  disasters  from  the  earliest  times,  but 
panics  in  the  modern  sense  are  a  product  of  the  system 
of  credits  and  speculation.  They  might  be  said  to  be  the 
price  paid  by  world  of  industry  for  these  two  great  agen- 
cies by  which  increased  power  is  given  to  commerce,  just 
as  steam  and  electricity  have  given  increased  facilities 
for  international  communication.  The  first  panic  result- 
ing from  the  misuse  of  credits  and  speculation  was  what 
is  known  as  "the  Mississippi  bubble"  in  Paris  in  1719; 
and  a  study  of  the  history  of  this  dramatic  incident  in 
French  history  will  well  repay  the  student  of  financial 
phenomena.  It  is  much  more  instructive  than  the  South 
Sea  bubble  in  London  which  was  almost  contemporane- 
ous with  it,  for  the  latter  was  conceived  in  fraud,  while 
John  Law,  the  promoter  of  the  Mississippi  scheme,  dis- 
covered the  secret  of  the  power  of  banking  credit,  and 
hoped  by  means  of  this  to  restore  the  depleted  finances 
of  France,  only  he  was  carried  off  his  feet  by  the  very 
power  he  had  invoked,  and  he  attempted  to  raise  a  build- 
ing of  ten  stories  on  a  foundation  intended  only  for  two. 
All  credit  and  speculative  panics,  though  differing  in 
details  and  in  effect  upon  the  general  welfare  of  the 
world,  closely  follow  the  outlines  of  this  original  great 
panic. 

Commercial   crises   are,   however,    much   more   funda- 


352  WORK  OF  WALL  STREET 

mental  to  the  productive  and  conservative  forces  of  the 
nations.  The  greatest  economists  have  for  years  been 
studying  the  phenomena  of  these  crises  and  there  is  now 
a  vast  body  of  literature  relating  to  them.  No  one  in 
charge  of  large  affairs  can  afford  to  be  wholly  ignorant 
of  their  history ;  yet  as  a  matter  of  fact  every  generation 
of  business  men  seems  to  be  surprised  at  the  outbreak 
of  each  new  panic ;  and  it  is  perhaps  to  the  fact  that  each 
generation  has  to  learn  for  itself  the  business  laws  which 
underlie  the  stability  of  business  enterprise,  and  learn 
these  lessons  by  actual  experience  rather  than  by  study 
of  the  past,  that  we  owe  in  part  the  periodicity  of  panics. 

Cycle  Theory. — The  "cycle  theory"*  of  commercial 
crises  is  accepted  by  most  students  of  economic  phe- 
nomena. This  theory  is  that  these  convulsions  come  at 
fairly  regular  intervals  of  about  ten  years;  for  instance, 
great  panics  about  every  twenty  years  and  generally  a 
smaller  crisis  midway  between  two  big  collapses  of 
credit.  Nothing  is  more  interesting  to  the  financial  stu- 
dent than  a  study  of  this  subject  from  the  standpoint  of 
the  cycle  theory,  although  one  should  thus  approach  the 
theme  with  caution,  for  the  theory,  useful  as  it  is  in  a 
degree,  can  be  easily  overloaded  until  it  breaks  down. 

Of  the  fact  that  the  history  of  the  world  travels  in  a 
series  of  curves  and  circles  there  are  abundant  illustra- 
tions, and  this  is  particularly  true  of  economic  history. 
The  accompanying  diagram  reveals  this  truth. 

*  "Mr.  John  Mills,  who  has  so  ably  treated  of  credit  cycles,  at- 
tributes the  periodic  variations  to  mental  action.  A  commercial 
panic,  he  holds,  is  the  destruction  of  belief  and  hope  in  the  minds 
of  merchants  and  bankers.  But  though  I  agree  with  him  so  far,  I 
can  see  no  reason  why  the  human  mind,  in  its  own  spontaneous  ac- 
tion, should  select  a  period  of  just  10.44  years  to  vary  in.  Surely 
we  must  go  beyond  the  mind  in  its  material  environment." 

W.  STANLEY  JEVONS. 


PANICS 


353 


Starting  with  business  depression,  a  long  period  of  this 
leads  inevitably  to  poverty.  Capital  suffers  from  di- 
minished profits  and  labor  from  reduced  wages  or  lack 
of  employment  altogether.  When  a  people  are  poor  they 
cannot  afford  to  war  among  themselves  or  with  their 
neighbors.  Peace  therefore  reigns,  and  peace  gives  time 
and  opportunity  for  recuperation  and  advance.  There- 

>ANIcf 


fore  out  of  peace  springs  national  prosperity.  When  this 
has  lasted  for  some  time,  it  results  in  individual,  cor- 
porate and  governmental  luxury  and  pride;  and  pride 
leads  to  clashes  of  ambition  and  to  war.  War  is  waste, 
though  its  immediate  effect  is  to  promote  speculation,  in- 
flation and  a  boom.  This  appearance  of  great  prosperity 
is  however  fictitious.  It  is  like  "the  house  built  upon  the 
sands";  and  the  inflation  of  credit  and  excessive  specu- 
lation inevitably  produce  the  crisis  which  surely  ends  in 
the  panic. 


354  WORK  OF  WALL  STREET 

Forecasting  a  Crisis. — This  cycle  may  take  more,  or 
sometimes  less,  than  exactly  the  twenty  years,  which 
seems  to  be  the  period  between  one  great  panic  and 
another,  but  every  generation  of  American  history  has 
seen  one  such  revolution  as  this;  and  by  expert  analysis 
of  financial  and  trade  statistics  it  is  possible  to  trace  with 
considerable  accuracy  the  various  steps  in  the  cycle,  and 
even  to  indicate  the  probability  of  the  approach  of  a  new 
crisis.  Taking,  for  instance,  the  statistics  of  bank  clear- 
ings and  business  failures,  and  bringing  them  together 
in  order  to  show  the  extent  of  business  disaster  to  the 
volume  of  business  transactions,  a  diagram  has  been  pre- 
pared by  R.  G.  Dun  &  Co.,  which  is  here  reproduced 
and  which  reveals  in  a  striking  manner  the  approach  of 
danger.  The  diagram  covers  a  period  of  twenty-one 
years,  including  the  two  big  panics — 1893  and  1907.  The 
line  represents  one  dollar  of  liabilities  of  defaulting  con- 
cerns in  the  United  States  to  one  thousand  dollars  of 
bank  clearings.*  The  high  peaks  of  this  line  of  disaster 
represent  panic.  The  line  covering  the  period  from  1890 
to  1900,  shows  most  vividly  the  great  crisis  of  1893,  that 
year  of  panic;  and  the  less  sensational  but  nevertheless 

•DEFAULTED  LIABILITIES  PEB  $1,000  EXCHANGES — BY  QUARTERS. 

First.         Second.  Third.  Fourth.  Year. 

1911 1.50  1.12               .93  1.26  1.21 

1910 1.63               .96  1.17  1.11  1.23 

1909 1.18  1.08               .68  .80  .92 

1908 2.52  1.60  1.69  1.09  1.68 

1907 77  1.04  1.35  2.48  1.36 

1906 81  .73               .59  .80  .78 

1905 85               .73               .62  .66  .71 

1904 1.89  1.25  1.26  .88  1.28 

1903 1.14  1.15  1.37  2.02  1.42 

1902 1.20  1.11               .86  1.02  .99 

1901 1.09              .69               .97  1.11  .95 

1900 1.53  1.95  1.54  1.44  1.61 

1899 1.12               .62               .83  1.26  .97 

1898 1.91  2.21  1.56  1.92  1.89 

1897 3.87  3.43  1.68  2.18  2.69 

1896..                   ...     4.47  3.16  6.38  3.95  4.37 


PER  CENT. 


PER   CENT. 


20      co 

!°H     ° 
1ST 

3D     ca 

30      = 
4TH 
1ST 

20      ca 
30      <= 


DIAGRAM  SHOWING  ONE  DOLLAR  OF  DEFAULTED  LIABILITIES  TO 
ONE  THOUSAND  DOLLARS  OF  BANK  CLEARINGS 


356  WORK  OF  WALL  STREET 

severe  crisis  of  1896  when  the  country  was  going 
through  a  campaign  in  which  free  silver  was  the  issue. 
It  shows  by  the  rapid  downward  swing,  the  quick  recov- 
ery in  1898  and  1899,  after  the  election  of  McKinley. 
The  line  in  the  succeeding  eleven  years,  from  1900  to  1911, 
shows  how  much  more  stable  and  even  business  con- 
ditions were  in  that  decade  as  compared  with  the  preced- 
ing; but  in  this  diagram  as  in  the  other  we  see  how  the 
line  of  disaster  rose  in  1907-8  during  the  panic  of  that 
period. 

It  is  methods  of  analysis  like  this  that  investigators  use 
in  studying  the  phenomena  of  panics  for  the  purpose  of 
ascertaining  if  there  are  signs  of  danger  ahead. 

Brief  History  of  Panics. — Wall  Street's  first  panic,  if 
it  may  be  dignified  by  that  term,  was  in  1791- '92.  The 
close  of  the  Revolutionary  War  had  been  followed  by  a 
boom  in  business,  both  in  England  and  the  new  American 
nation.  This  boom  led  to  overspeculation,  which  in  this 
country  was  in  the  new  securities  of  the  Government  and 
in  the  stocks  of  the  recently  organized  banks.  "The 
period  immediately  succeeding  the  Revolutionary  War," 
wrote  William  M.  Gouge  in  1833,  "was  in  a  peculiar 
sense  an  age  of  speculation."  Distress  and  embarrass- 
ment followed,  and  to  relieve  the  stringency  in  money, 
Secretary  Hamilton  bought  United  States  bonds  in  the 
open  market,  thus  releasing  a  stream  of  Treasury  money. 
But  the  little  panic  did  not  last  long,  and  for  twenty 
years  the  United  States  enjoyed  a  period  of  marvelous 
growth. 

The  second  war  with  England,  in  1812-  '14,  precipitated 
the  first  great  commercial  crisis  of  the  new  country.  The 
closing  of  the  ports,  the  strain  and  expense  of  war,  and 
abuses  in  banking  were  the  causes  of  this  crisis.  Peace 
introduced  another  time  of  prosperity,  which  was  inter- 
rupted by  the  short  but  severe  panic  of  1818,  due  largely 


PANICS  357 

to  overexpansion  of  credits  by  the  United  States  Bank 
and  other  banking  institutions.  Much  misery  ensued, 
and  the  debtors'  prisons  were  filled. 

It  was  eight  years  before  there  was  another  panic,  and 
in  the  meantime  the  nation,  with  all  the  vitality  of  youth, 
recovered  from  its  financial  illness  and  enjoyed  wonder- 
ful growth  and  strength. 

There  was  a  panic  in  England  in  1825,  caused  by  two 
poor  harvests  and  overspeculation  in  South  American  en- 
terprises, and  the  following  year  the  tide  of  disaster 
reached  the  United  States.  The  Franklin  Bank,  the  Mar- 
ble Manufacturing  Company,  and  other  firms  failed,  and 
Jacob  Barker  suspended.  This  disturbance  over,  the 
country  enjoyed  many  years  of  prosperity,  broken,  how- 
ever, by  temporary  monetary  upheavals  in  1829  and  1831. 

But  in  1837  one  of  the  greatest  panics  in  the  history  of 
the  country  occurred.  There  had  been  a  partial  recovery 
from  this,  when  another  panic  broke  out  in  1839,  and 
there  was  another  upheaval  in  1841,  due  to  the  final  fail- 
ure of  the  United  States  Bank.  The  next  panic  was  in 
1848,  but  was  not  so  disastrous.  It  was  produced  by  the 
more  severe  crisis  in  England  the  preceding  year,  a  crisis 
in  one  country  nearly  always  causing  a  disturbance  in 
another. 

Eight  years  of  financial  calm  and  commercial  pros- 
perity followed,  with  immense  expansion,  due  chiefly  to 
the  discovery  of  gold  in  California,  but  in  1857  panic,  like 
that  in  1837,  burst  upon  the  country  almost  without 
warning. 

The  period  of  the  Civil  War  presented  the  character- 
istics of  both  panic  and  boom.  Specie  payments  were 
suspended  and  the  banks  were  obliged  to  issue  loan  cer- 
tificates, but  the  enormous  output  of  paper  money  pro- 
duced all  the  effects  of  inflation.  There  was  wild  specu- 
lation and  high  prices,  but  the  fearful  strain  of  four  years 


358  \YORK  OF  WALL  STREET 

of  battles  severely  taxed  the  resources  of  business. 
Eighteen  hundred  and  sixty-four  is  called  the  year  of  the 
war  panic. 

The  failure  of  Overend,  Guerney  &  Company  in 
England  in  1866  produced  a  disturbance  in  Wall  Street, 
but  nothing  like  that  experienced  in  London.  Black  Fri- 
day in  1869  was  a  Wall  Street  panic.  The  Chicago  fire 
of  1871,  involving  a  loss  of  $196,000,000,  and  the  Boston 
fire  of  1872,  involving  a  loss  of  $80,000,000,  also  caused 
panics  in  the  Street  and  much  distress  in  different  parts 
of  the  country.  They  were  among  the  many  things  that 
brought  about  the  great  commercial  crisis  of  1873,  from 
which  both  Street  and  nation  suffered  immense  losses. 

The  resumption  of  specie  payments  in  1879  ushered  in 
a  memorable  boom,  but  from  the  shooting  of  Garfield,  in 
1881,  there  started  a  gradual  downward  movement  that 
culminated  in  the  panic  of  1884,  which,  in  its  worst  ef- 
fects, was  confined  to  Wall  Street,  but  which  was  felt  to 
some  extent  all  over  the  country. 

The  next  panic  was  in  1890,  as  a  result  of  the  suspen- 
sion of  the  Barings,  of  London'.  This  was  stopped  from 
becoming  a  world-wide  calamity  only  by  the  action  of  the 
Bank  of  England,  which  used  its  own  resources  and  those 
of  other  institutions  uniting  with  it  to  save  the  firm  from 
utter  failure.  The  New  York  Bank  Clearing-House  came 
to  the  relief  of  this  country  by  a  liberal  issue  of  loan  cer- 
tificates. Wall  Street  was  convulsed  by  the  blow  to 
credit  inflicted  by  this  event. 

In  this  same  year  the  Sherman  silver-purchase  bill  was 
passed  by  Congress.  While  it  was  still  under  discussion 
in  the  national  legislature,  A.  J.  Drexel,  the  famous 
Philadelphia  banker,  said  to  the  writer  that  it  would 
cause  the  worst  panic  from  which  this  country  had  ever 
suffered,  a  prediction  fulfilled  three  years  later.  The 
panic  of  1893  was  caused  by  the  fear  that  the  United 


PANICS  359 

States  would  go  on  a  silver  basis,  and  it  did  not  end  until 
the  election  of  McKinley  on  a  gold-standard  platform. 

The  great  convulsions  of  1837,  1857,  1873,  and  1893 
were  commercial  panics  of  national  scope.  As  a  matter 
of  fact,  the  effects  of  such  crises  are  world-wide.  All 
true  panics  are  international.  The  American  panics  of 
1814,  1818,  1826,  1831,  1837,  1848,  1857,  1866,  1873,  1884, 
1890,  and  1893  were  closely  preceded,  accompanied,  or 
followed  by  similar  crises  in  Europe. 

Following  1897  came  years  of  plenty,  interrupted  by  a 
stock  flurry  caused  by  the  death  of  former  Governor 
Flower  and  the  early  British  defeats  in  the  Boer  War, 
the  memorable  stock  panic  of  1901  caused  by  the  North- 
ern Securities  corner,  and  the  severe  liquidation  of 
1903 — called  the  panic  of  "the  undigested  securities." 

There  was  no  big  commercial  depression  until  the  con- 
vulsion of  1907,  which,  although  occurring  only  fourteen 
years  after  the  1893  collapse,  presented  all  of  the  char- 
acteristics of  a  crisis  of  the  first  magnitude.  It  was  the 
splendid  and  courageous  leadership  of  Mr.  Morgan,  as- 
sisted by  another  Clearing-House  Loan  Committee,  that 
prevented  the  1907  panic  from  developing  into  a  com- 
plete business  collapse  from  which  it  would  have  taken 
the  country  years  to  recover ;  but  though  it  fell  short  of 
being  so  grave  a  disaster,  yet  its  effects  upon  the  trade 
of  the  country  were  felt  for  several  years. 

Safeguards. — There  seems  to  be  no  absolute  safeguard 
against  the  great  commercial  crises.  But  there  has  been 
evolved  a  mechanism  which  checks  their  progress  and 
minimizes  their  evil  effects.  This  mechanism  is  supplied 
by  the  Bank  Clearing-House.  This  is  the  country's 
breakwater  against  the  waves  of  panic.  By  the  issue  of 
Clearing-House  loan  certificates,  the  banks  are  able  with- 
out fear  to  extend  credit  to  their  solvent  customers,  and 

thus  thousands  of  deserving  firms  are  saved  from  failure. 
25 


360  WORK  OF  WALL  STREET 

But  loan  certificates  do  not  prevent  panics;  they  only 
check  them.  The  very  issue  of  loan  certificates  is  proof 
that  panic  has  begun.  The  very  suggestion  that  certifi- 
cates should  be  issued  might  of  itself  be  sufficient  to  cause 
a  panic.  They  are  therefore  an  alleviation,  not  a  pre- 
ventive. They  represent  a  measure  adopted  as  a  last 
resort.  In  nine  great  monetary  convulsions  they  have 
performed  an  immense  service  to  the  country,  but  some- 
thing better  and  more  instantaneous  is  required. 

No  epidemic  travels  faster  than  fear,  and  most  Wall 
Street  panics  are  the  result  of  fear.  Generally  the  most 
that  can  be  done  is  to  establish  a  quarantine.  If  a  panic 
can  only  be  foreseen  it  may  be  stopped,  unless  indeed  the 
trouble  is  too  deep-seated.  But  the  unexpected  is  always 
happening  in  Wall  Street,  and  there  may  not  be  time  to 
raise  safeguards.  % 

Still  it  does  not  take  long  to  pull  the  lever  of  safety. 
Let  us  take  a  typical  illustration.  Nothing  could 
have  been  more  unexpected  and  terrifying  than  the 
shooting  of  McKinley.  This  took  place,  fortunately, 
after  the  close  of  the  stock-market.  One  member  of  the 
Clearing-House  Committee,  J.  Edward  Simmons,  was  in 
the  city.  He  took  immediate  steps  to  prevent  the  threat- 
ened panic.  The  next  morning,  before  the  stock-market 
opened,  a  meeting  was  held  in  the  Clearing-House,  at- 
tended by  the  leading  bankers,  at  which  a,  pool  of 
$30,000,000  was  formed,  and  the  announcement  made  that 
this  sum  would  be  loaned  in  the  Exchange  at  market 
rates.  Not  a  dollar  of  the  money  was  used.  The 
$30,000,000  were  not  needed.  The  very  assurance  that 
the  banks  were  ready  and  able  to  protect  the  market  was 
sufficient  to  prevent  any  panic. 

In  times  of  monetary  distress  there  is  also  another 
source  of  relief — the  Treasury.  Better,  however,  than 
any  Treasury  disbursement  by  redemptions  of  bonds 


PANICS  361 

would  be  a  new  banking  system  providing  for  a  more 
elastic  currency.  Such  a  system  would  be  an  added  safe- 
guard against  the  ravages  of  panic.  The  need  of  cur- 
rency reform  has  long  been  felt,  and  at  last  the  country 
seems  to  be  preparing  for  it,  although  it  may  take 
persistent  agitation  and  education  to  bring  it  about. 

The  present  system  of  a  bank-note  circulation  based  on 
Government  bonds,  and  of  Government  deposits  in  the 
banks  also  secured  by  bonds,  is  absolutely  inadequate  to 
the  needs  of  the  country.  It  is  antiquated  and  inelastic. 
In  times  of  financial  distress  it  fails  to  furnish  the  needed 
relief.  Speaking  of  the  panic  of  1893,  former  Comptrol- 
ler of  the  Currency  Hepburn  in  an  address  delivered  ten 
years  ago  said: 

The  Government  was  powerless  to  afford  relief.  Our  currency 
was  as  unresponsive  to  the  wants  of  trade  as  the  pyramid  of 
Cheops.  Some  banks  borrowed  United  States  bonds  from  sav- 
ings banks  and  other  institutions  and  took  out  circulation,  but 
no  bank  could  buy  bonds  and  take  out  circulation  without  aggra- 
vating instead  of  relieving  the  money  stringency.  What  we  need 
is  legislation  (or  relief  from  legislation)  that  will  permit  banks 
to  do  within  the  law  and  under  wholesome  regulations  precisely 
what  the  banks  under  stress  of  necessity  did  in  1893  in  contra- 
vention of  law. 

•  Loan  Certificates. — Mr.  Hepburn  argued  that  the  time 
had  gone  by  when  the  Clearing-House  loan  certificates 
could  be  safely  availed  of  in  the  city  of  New  York.  They 
would,  he  says,  materially  impair  our  national  prestige 
as  a  money  power  in  the  world  of  finance  and  depreciate 
our  securities  as  a  nation.  They  would  materially  injure 
the  banking  and  commercial  interests  of  the  city. 

Nevertheless  it  was  found  necessary  in  1907  again  to 
resort  to  Clearing-House  loan  certificates,  although  in 
that  year  and  in  1906  upwards  of  $200,000,000  of  gold 
was  imported.  In  the  three  months  from  October,  1907, 


362 


WORK  OF  WALL  STREET 


to  January,  1908,  an  issue  of  $101,060,000  Clearing-House 
certificates  were  issued  in  New  York,  and  $147,219,700  in 
forty-nine  other  cities,  making  a  total  issue  in  the  whole 
country  of  $248,279,700.  The  following  is  a  complete 
record  of  loan  certificates  issued  by  the  New  York  Clear- 
ing-House : 

Historical   Record    of   Loan    Certificates    Issued    by   New    York 
Clearing-House   Association. 


s 

First  issue 

3 

»  3 

li 

t-  ^ 

Final  can- 
cellation 

|l 

tcl 

1860 
1861 

Nov.     23 
Sept.    19 

$  6,860.000 
21.960.000 

$     '<  ,375,000 
22,585,000 

March   9,  1861 
April    28,  1862 

1863 

Nov.       6 

9.608.000 

11,471.000 

Feb.       1,  1864 

1864 

March    7 

16.418.000 

17,728,000 

June    13,  1864 

1873 

Sept.    22 

22.410.010- 

26,565.000 

Jan.      14,  1874 

1884 

May     15 

21.881.000 

24,915,000 

Sept.    23,  1884 

1890 

Nov.     12 

15.205,000 

16.645.000 

Feb.        7,  1891 

1893 

June    21 

38.280.000 

41,490.000 

Nov.       1,  1893 

1907 

Oct      26 

88,420,000 

101.060.000 

March  28,  1908 

Total 

$269,834,000 

The  words  of  Mr.  Hepburn  were  true,  the  experience  of 
1907  demonstrating  their  correctness.  Something  better 
must  be  devised  than  Clearing-House  certificates  as  a 
panic  preventative.  One  of  the  results  of  the  1907  panic 
has  been  to  bring  about  a  substantial  unanimity  among 
the  bankers  of  the  country  in  favor  of  a  Central  Reserve 
Association  along  the  lines  of  a  plan  suggested  by  the 
National  Monetary  Commission,  of  which  ex-Senator 
Aldrich  is  Chairman. 


PANICS  363 

To  recapitulate: 

There  are  two  main  classes  of  panics.  1.  The  com- 
mercial crisis,  spreading  over  the  entire  country  and  in- 
volving every  department  of  business.  For  this  k^nd  of 
panic  there  is  now  one  principal  mechanism  of  relief, 
namely,  the  Clearing-House  loan  certificates,  which,  as 
has  been  seen,  are  only  an  inadequate  measure  of  the  last 
resort.  2.  The  Wall  Street  panic,  confined  chiefly  to 
the  stock-market  and  playing  havoc  with  prices  of  se- 
curities, but  not,  at  least  immediately,  harmful  to  outside 
business.  It  is  sometimes  possible  by  a  prompt  applica- 
tion of  the  power  of  the  money-market  to  check  the 
progress  of  this  kind  of  convulsion. 

But  it  is  urged  by  the  financial  experts  that  a  new 
mechanism  is  imperatively  demanded  by  the  conditions 
of  the  country,  a  mechanism  that  will  supply  additional 
and  safe  currency  when  it  is  most  needed,  and  that  will 
be  retired  when  there  is  no  further  use  for  it.  This  re- 
quires a  large  reserve  held  in  some  adequately  protected 
and  controlled  institution^  Such  an  institution  is  that  of 
the  Central  Reserve  Association  proposed  by  the  Mone- 
tary Commission.  The  creation  of  this  Association  would 
probably  deprive  New  York  of  part  of  its  present 
financial  power,  but  on  the  other  hand,  relieve  it  of  much 
of  its  present  burdensome  responsibility  in  time  of  stress 
and  panic. 

REFERENCES 

"A  Brief  History  of  Panics,"  Clement  Juglar,  1897. 
"Financial  Crises  and  Periods  of  Industrial  and  Commercial  De- 
pression," Theodore  E.  Burton,  1907. 
"Lessons  of  the  Financial   Crisis,"   Cortelyou,   Vanderlip,   Treat, 

Ridgely  and  Schiff,  1908. 

"History  of  Crises  under  the  National  Banking  System,"  Dr.  O. 
M.    W.    Sprague,    National    Monetary    Commission,    Senate 
Document  538.     (Exhaustive  on  American  Panics  since  and 
including  1873.) 
"Overproduction  and  Crises,"  Karl  Rodbertus. 


^  CHAPTER  XXV 

MANIPULATION  AND  CORNERS 

Manipulation  is  of  two  kinds,  these  being  well  indi- 
cated by  the  Standard  Dictionary  definitions  of  the  word : 
1,  adroit  or  skillful  management ;  2,  fraudulent  or  decep- 
tive management. 

The  latter  is  dishonest  without  qualification,  and  much 
of  the  odium  which  attaches  to  Wall  Street  is  the  result 
of  this  kind  of  stock  manipulation,  which,  it  may  be  said, 
is  on  the  decline,  due  to  restrictive  and  publicity  methods. 
It  consists  mainly  in  the  influencing  of  the  course  of 
prices  by  false  reports.  This  is  the  only  kind  of  manipu- 
lation that  can  be  played  by  a  small  man.  Any  one  can 
lie,  and  a  lie  has  a  wonderful  power  of  communicating 
itself  through  the  Street  by  a  sort  of  wireless  telegraphy. 
It  is  remarkable  how  many  things  one  hears  in  the  stock- 
market  that  "aren't  so."  These  false  reports  generally 
have  a  temporary  effect  on  prices.  But  a  lie  persisted  in 
is  almost  as  good  as  the  truth.  A  false  report,  therefore, 
may  be  so  often  repeated  that  in  spite  of  official  denials 
many  will  continue  to  believe  in  it,  on  the  principle  that 
where  there  is  so  much  smoke  there  must  be  some  fire. 
In  such  a  case  the  effect  on  prices  may  be  prolonged.  The 
laws  of  the  State  make  it  a  penal  offense  to  originate  or 
maliciously  repeat  falsehoods  for  the  purpose  of  injuring 
the  value  of  another's  property,  but  it  is  difficult  to  track 
a  lie  to  its  lair. 

In  a  suit  brought  against  members  of  a  syndicate 
charged  with  fraudulent  manipulation,  the  complaint 
thus  described  its  operations: 

364 


MANIPULATION  AND  CORNERS  365 

Selling  stocks  to  the  public  by  improperly  spread  "tips"  and  al- 
leged information. 

Procuring  loans  from  banking  institutions  throughout  the  coun- 
try on  stocks  having  fictitious  values. 

Procuring  the  purchase  of  stock  by  means  of  alleged  custom- 
ers furnished  to  various  stock -brokerage  houses  throughout  the 
country.  The  said  customers  would  deposit  on  margin  with  the 
brokers  a  small  proportion  of  the  purchase  price  of  the  stocks, 
and  these  brokers  would  immediately  buy  for  their  supposed 
customers'  account  the  stocks  required,  paying  the  syndicate's 
agents  the  full  price  thereof,  these  brokers  advancing  the  differ- 
ence from  their  own  funds  between  such  purchase  price  and  the 
amount  of  margin  deposited  with  them  by  their  supposed  cus- 
tomers. 

Tips  and  Wash  Sales. — In  other  words,  by  false  tips 
and  matched  orders  or  wash  sales  the  manipulators  en- 
deavored to  establish  fictitious  quotations  for  their  stocks. 
If,  for  instance,  the  security  was  actually  worth  only  $50 
a  share,  and  by  this  means  its  market  price  was  estab- 
lished at  $120,  the  manipulators  might  be  able  either  to 
sell  to  innocent  investors  at  nearly  150  per  cent,  profit, 
or  to  obtain  loans  from  country  banks  for  amounts 
largely  in  excess  of  true  value.  The  late  Bishop  Potter, 
in  an  address  at  Yale,  said  truly:  "The  capitalist  whom 
no  honest  man  can  hold  converse  with  is  he  who  arti- 
ficially depresses  values  to  the  injury  or  loss  of  his  fellow 
directors,  or  who  withholds  information  regarding  the 
conditions  of  his  company  for  his  own  personal  advan- 
tage, or  who  by  obscure  bookkeeping  deceives  those 
whose  money  he  holds  in  trust."  He  might  also  have 
added,  "or  who  artificially  advances  prices  to  the 
injury,"  etc. 

Manipulation  and  Diplomacy. — But  there  is  a  higher 
type  of  manipulation  than  this.  It  may  be  described  as 
the  fine  art  of  buying  and  selling  stocks  to  the  best  ad- 
vantage. The  high  manipulator  is  the  diplomatist  of  the 


366  WORK  OF  WALL  STREET 

Street.  The  diplomatist  never  lies,  but  he  sometimes 
makes  the  worst  appear  the  better  reason.  He  does  not 
lie,  but  he  conceals  his  purposes  so  as  not  to  disclose  his 
operations. 

Secrecy. — Secrecy  is,  in  fact,  the  first  object  of  stock 
manipulation.  It  is  quite  impossible  to  tell  in  a  few  words 
how  this  is  done.  But  it  may  be  said  briefly  that  the 
manipulator  operates  through  several  brokers  at  the  same 
time.  He  may  buy  through  some,  and  sell  through  others, 
so  that  no  one,  not  even  the  brokers  themselves,  can  be 
certain  what  his  true  position  in  the  market  is.*  Let  us 
suppose  that  the  manipulator  represents  a  pool  which 
has  a  large  amount  of  stock  to  sell.  It  would  not  do  to 
throw  it  upon  the  market  at  once,  nor  is  it  advisable  that 
the  Street  should  know  that  the  pool  is  selling.  So  it 
may  be  buying  with  one  hand  and  selling  with  the  other, 
being  careful,  however,  to  sell  more  than  it  buys,  and 
thus  in  the  course  of  time  the  whole  amount  may  be  dis- 
posed of.  There  may  have  been  a  loss  on,  say,  100,000 
shares  bought,  but  the  profit  on  150,000  shares  sold  may 
be  so  large  as  to  make  the  entire  operation  very  satis- 
factory to  the  members  of  the  pool.  In  order  to  maintain 
the  price  of  the  stock  it  is  trying  to  sell,  the  pool  may 
find  it  necessary  to  buy  other  stocks,  in  order  to  give  the 
general  market  the  appearance  of  strength.  Capitalists 

*  A  story  told  of  the  late  Charles  H.  Dow  is  a  good  illustration 
of  this.  Mr.  Dow,  who  had  a  remarkable  memory,  had  one  after- 
noon a  long  interview  with  Jay  Gould.  While  talking  with  Dow, 
Gould  continued  to  give  stock-market  orders  to  a  succession  of 
brokers.  This  he  did  without  any  attempt  to  conceal  wliat  he  was 
doing  from  Mr.  Dow.  He  told  one  broker  to  sell  this  stock  and 
another  to  buy  that  stock,  and  every  few  minutes  he  gave  a'  new 
order  as  he  stood  calmly  fingering  the  stock  tape  and  gravely  dis- 
cussing public  questions  with  his  caller.  Mr.  Dow  made  a  mental 
note  of  every  order  Gould  made,  and  after  he  left  he  put  them 
down  on  paper  in  regular  order.  Then  he  put  his  analytical  mind 
to  the  task  of  discovering  from  this  data  whether  Gould  was  a  bull 
or  a  bear.  But  even  Mr.  Dow  had  to  give  the  problem  up,  so  skill- 
fully had  Gould  covered  his  real  purpose  in  a  labyrinth  of  orders. 


MANIPULATION  AND  CORNERS  367 

controlling  a  railroad  system  sometimes  consider  it  es- 
sential to  "support"  the  stocks  of  the  system,  as  the 
credit  of  the  railroad,  its  ability  to  borrow  money,  and 
the  ability  of  its  individual  directors  to  obtain  the  means 
for  large  operations  depend,  in  no  small  measure,  on  the 
market  value  of  its  securities.  Likewise  an  underwriting 
syndicate  which  has  undertaken  to  float  a  large  issue  of 
new  securities  is  sometimes  compelled  to  prepare  the 
market  to  absorb  them.  This  preparation  may  consist  of 
an  elaborate  manipulation  of  both  money-  and  stock- 
markets,  so  as  to  make  rates  for  loans  easy  and  prices  of 
stocks  attractive  to  investors  and  speculators.  As  a  pre- 
liminary to  a  bull  market  it  is  often  necessary  first  to 
clean  out  the  weak  holders  of  stocks  and  depress  prices 
to  a  point  where  they  look  like  bargains.  The  first  act  of 
a  bull  pool,  therefore,  may  actually  be  to  bear  prices.  If 
the  manipulator  seeks  to  accumulate  stocks,  he  will  of 
course  try  to  break  prices  by  a  raid  or  attack  on  the 
market,  which  is  accomplished  by  furiously  selling  short. 
Suppose  the  manipulator  discovers  that  long  stock  is  held 
in  weak  hands,  and  that  there  are  many  stop  orders  in 
the  market.  He  may  institute  a  bear  attack  in  order  to 
force  liquidation,  and  uncover  the  stop  orders,  which,  as 
has  already  been  explained,  are  orders  to  sell  when  prices 
reach  certain  figures,  generally  marking  the  limits  of  the 
customers'  margins.  The  manipulator  may,  and  often 
does,  strive  to  influence  prices  in  New  York  by  having 
orders  cabled  from  London,  so  as  to  convey  the  impres- 
sion that  English  investors  are  in  the  market.  This  often 
has  the  desired  effect  on  prices. 

Manipulation  of  the  highest  kind  is  a  millionaire's 
game.  It  can  not  be  played  by  the  man  of  limited 
means.  It  requires  command  of  immense  resources,  such, 
for  instance,  as  James  R.  Keene  possessed  as  a  man  of 
wealth  himself  and  as  the  agent  of  capitalists  and  syndi- 


368  WORK  OF  WALL  STREET 

cates  of  enormous  power.  The  manipulator  in  stocks  is 
like  the  manipulator  in  politics,  who  pulls  the  wires, 
which  are  generally  underground,  in  order  to  control  con- 
ventions and  make  nominations.  But  the  politician, 
while  thus  engaged,  can  not  entirely  ignore  the  potency 
of  public  policies,  and  can  not  defy  too  long  the  will  of 
the  people,  or  he  may  be  overwhelmed.  So  the  manipu- 
lator in  stocks,  by  pulling  concealed  wires  and  by  a  sci- 
entific arrangement  of  his  forces  as  intricate  and  fasci- 
nating as  a  game  of  chess,  is  able  to  make  prices.  But 
he  must  nevertheless  not  go  too  far  from  the  true  basis 
of  value,  or  even  he  may  be  overwhelmed  in  the  market. 

Manipulation  at  times  plays  an  important  part  in  stock 
speculation.  For  days  and  even  weeks  together  the  mar- 
ket may  be  in  the  hands  of  the  manipulators.  Difficult 
as  it  is  to  estimate  values,  it  is  still  more  difficult  to 
fathom  the  intrigues  of  the  manipulators.  It  is,  how- 
ever, generally  possible  to  ascertain  whether  the  market 
as  a  whole  is  subject  more  to  professional  than  public 
control.* 

Corners. — A  corner  is  that  condition  of  a  stock  in  which 
the  supply  is  held  by  one  operator  or  by  a  clique  of  op- 
erators, and  in  which  many  have  contracted  to  deliver 
to  the  operator  or  clique  what  they  can  obtain  only  from 
the  operator  or  clique.  This  is  a  condition  which  results 
from  the  operation  of  selling  short.  For  instance,  the 
total  issue  of  a  certain  stock  may  be  100,000  shares.  A 
clique  of  operators  have  quietly  acquired  all  the  available 
supply,  as  well  as  40,000  shares  more,  bought  from  spec- 
ulators who,  believing  that  the  price  was  too  high,  have 
sold  the  stock  short.  It  is  obvious  that  when  these  shorts 
are  called  upon  to  deliver  the  stock  they  have  sold,  they 
find  that  they  can  buy  only  from  those  to  whom  they  have 
sold,  and  are  therefore  caught  in  a  vise.  The  only  way 

*  See  reference  to  Manipulation  in  Hughes  Commission  report. 


MANIPULATION  AND  CORNERS  369 

of  escape  is  by  settling  at  a  price  fixed  by  the  clique  or 
by  a  repudiation  of  contracts,  which  amounts  to  failure. 
The  victims  of  a  corner  are  not  generally  entitled  to 
much  sympathy,  as  they  have,  with  their  eyes  open  to  the 
risks  involved,  sold  something  they  did  not  own. 

Corners  may  be  divided  into  two  classes,  one  including 
those  which  are  deliberately  planned,  and  the  other  those 
which  create  themselves.  The  corner  of  1901  in  Northern 
Pacific,  which  advanced  the  price  to  1,000,  was  of  the 
second  class.  It  resulted  naturally  from  a  contest  for 
the  control  of  the  company  between  two  great  syndicates 
which  bought  the  entire  issue  of  stock.  Meanwhile,  other 
individuals  had  sold  short  what  they  did  not  own,  and 
when  called  upon  to  deliver  on  their  contracts,  found  that 
the  market  supply  was  exhausted,  and  that  the  two  syn- 
dicates, having  bought  for  actual  control,  wanted  the 
stock  and  not  a  settlement  of  differences.  The  result  was 
a  convulsion  in  the  market. 

History  of  Corners. — Wall  Street  has  had  many  corners 
in  the  past  eighty  years.  The  most  famous  of  all  was 
Gould's  attempt  to  corner  gold,  which  ended  in  Black 
Friday.  Another  celebrated  corner  was  that  in  Hannibal 
and  St.  Joseph  stock  in  1881.  This  was  conducted  by 
John  R.  Duff,  and  was  not  successful,  owing  to  the  faith- 
lessness of  Duff's  broker,  who  was  expelled  from  the  Ex- 
change. 

Soon  after  this  deal  the  State  Legislature  appointed  a 
committee  to  investigate  corners,  and  its  report  covered 
several  hundred  pages,  but  resulted  in  no  important  leg- 
islation. As  long  ago  as  1836  the  Stock  Exchange  itself 
appointed  a  committee  to  investigate  corners.  There  had 
been  the  year  before  two  big  corners.  A  clique  bought 
up  the  stock  of  the  Morris  Canal  Company  much  below 
par  and  compelled  many  shorts  to  settle  at  150.  There 
was  a  corner  in  Harlem  the  same  year.  There  were  only 


370  WORK  OF  WALL  STREET 

7,000  shares  then  issued,  and  yet  the  pool  was  able  to  buy 
from  shorts  over  60,000  shares  inside  of  two  months,  and 
compelled  them  to  settle  at  high  figures. 

In  1863  and  1864  Commodore  Vanderbilt's  two  cele-i 
brated  corners  in  Harlem  took  place.  In  one  he  caught 
the  city  aldermen,  and  in  the  other  the  State  legislators, 
short,  and  compelled  them  to  submit  to  his  terms.  The 
corners  grew  out  of  a  franchise  to  lay  rails  on  Broadway, 
and  the  politicians  thought  that  they  held  the  key  to  the 
speculation,  but  they  were  beaten  by  one  of  the  ablest 
men  in  American  business.  The  Prairie  du  Chien  corner 
in  1865;  the  corner  in  Michigan  Southern  in  1866;  the 
many  corners  in  Erie  conducted  by  Drew  and  Gould ;  the 
corner  in  Northwest,  engineered  by  Gould  in  1872,  when 
the  shorts  had  to  settle  at  230,  and  when  an  attempt  was 
made  to  deliver  preferred  stock  on  common  stock  con- 
tracts; and  S.  V.  White's  corner  in  Lackawanna  in 
March,  1884 — these  are  among  the  notable  events  in  the 
history  of  speculation. 

Corners  in  grain,  cotton,  and  coffee  have  generally  been 
failures.  Even  Keene  failed  utterly  in  an  effort  to  corner 
the  corn  market.  The  reason  is  that  the  products  are  too 
large,  and  there  are  too  many  sources  of  supply,  success- 
fully to  establish  a  monopoly.  Still  there  have  been  a 
few  successful  corners  in  products,  and  it  is  related  that 
one  hundred  and  twelve  years  ago  Ouvrard,  a  noted 
European  speculator,  succeeded  in  cornering  first  the 
paper  and  then  the  coffee  market. 

While  manipulation  and  corners  have  not  been  and 
apparently  can  not  be  prevented,  many  of  the  grosser 
evils  that  formerly  attended  them  have  been  reformed. 
The  millennium  has  not  arrived  in  Wall  Street,  but  se- 
curity and  good  faith  abound  there  to  a  larger  extent 
than  they  did  thirty  years  ago. 


CHAPTER  XXVI 
PESTS  OF  WALL  STREET 

The  Wall  Street  district  contains  many  men  eager  to 
capture  the  money  of  stupid  people.*  They  are  bogus 
brokers,  tipsters,  blind-pool  sharps,  and  men  who  offer  to 
sell  you  an  infallible  system  for  .beating  the  stock- 
market.  It  was  estimated  some  years  ago  that  there 
were  upwards  of  eight  hundred  bucket-shops  in  the 
United  States.  Some  of  these  concerns  went  by  the  name 
of  "Exchanges"  and  "Syndicates."  Their  number  has 
been  much  reduced  in  recent  years.  Others  advertise 
largely  as  "bankers,"  and  maintain  expensively  fur- 
nished suites  of  offices.  As  Mr.  Clews  says,  they  are  the 
"degenerates"  of  the  Street.  The  government,  through 
the  Post-Office  Department,  and  the  organized  exchanges, 
wage  continual  war  upon  them. 

The  Street  has  suffered  severely  in  money  and  reputa- 
tion from  these  pests  of  speculation.  They  certainly  have 
done  at  times  a  heavy  business,  a  part  of  which  would 
otherwise  flow  through  the  regular  channels  of  specula- 
tion. The  outsider  naturally  identifies  them  with  the 
legitimate  operations  of  the  Street.  He  supposes  that 
they  are  a  part  of  the  system.  But  they  are  foul  ex- 
crescences on  the  stock-market.  They  are  practically  of 
the  same  character  as  pool-rooms  and  policy-shops.  They 
are  gambling  places,  with  this  difference  in  favor  of  the 
gambling-house :  there,  one  can  at  least  see  the  dealer ; 
but  in  these  outside  Wall  Street  concerns  one  enters  a 

*  "At  times  a  great  many  stupid  people  have  a  great  deal  of 
stupid  money."  WALTER  BAGEHOT. 

371 


372  WORK  OF  WALL  STREET 

bliud  pool,  and  he  may  or  may  not  meet  with  fair  treat- 
ment. 

In  the  bucket-shop  there  is  no  actual  transfer  of  stock 
or  "intent  to  deliver."  All  that  takes  place  practically 
is  the  registering  of  a  bet  on  prices.  This  affords1  facili- 
ties for  cheap  speculation,  and  the  bucket-shops  are  filled 
with  clerks  and  other  persons,  women  as  well  as  men,  of 
small  salaries  or  incomes,  all  eager  to  double  their  money 
in  the  Street,  and  all  inflamed  by  the  stories  told  of  the 
immense  fortunes  that  have  been  made  there.  These  are 
the  very  people  who.  should  keep  out  of  the  stock-market. 
They  have  not  the  means  and  the  knowledge  for  success- 
ful operations  there.  Most  people  who  enter  Wall  Street 
speculation  are  bulls,  and  the  customers  of  the  bucket- 
shops  bet  that  prices  will  advance,  so  that  the  proprietors 
reap  a  golden  harvest  in  a  bear  market.  In  a  continuous 
bull  market  the  bucket-shops  generally  shut  up.  They 
can  make  no  money  when  their  customers  are  winning. 
That  is  the  difference  between  them  and  the  Stock 
Exchange  broker.  The  latter  is  most  successful  when  his 
customers  are  making  money.  Every  now  and  then  the 
papers  record  the  failure  of  one  of  these  bogus  firms. 
The  real  proprietors  decamp,  and  all  that  remain  are  a 
few  clerks,  a  set  of  office  furniture,  and  a  crowd  of 
clamorous  and  angry  customers.  Most  of  the  concerns 
have  high-sounding  names,  sometimes  imitating  as  much 
as  possible  the  names  of  famous  houses.  Usually  the  men 
actually  in  control  keep  in  the  background.  Under  a 
law  of  New  York  the  keeping  of  a  bucket-shop  is  a  felony. 

Bogus  Brokers. — Writing  of  bogus  brokers,  Francis  L. 
Eames  says,  in  his  book  on  "The  Stock-Exchange": 

These  people  establish  themselves  in  the  neighborhood  of  Wall 
Street  in  large,  imposing  offices,  with  numerous  clerks.  By  ex- 
tensive advertising  in  the  newspapers  and  by  sending  out  vast 
quantities  of  circulars  through  the  mails,  large  sums  of  money 


PESTS  OF  WALL  STREET      .  373 

are  drawn  from  the  public  theoretically  for  speculation  in  stocks. 
The  bogus  broker  is  not  connected  with  the  Exchange,  and  no 
stocks  are  really  bought  or  sold,  though  notices  of  purchase  and 
sale  are  given  to  customers,  usually  without  the  names  of  the 
parties  with  whom  the  contracts  are  supposed  to  have  been  made. 
A  favorite  method  is  to  induce  people  to  enter  into  alleged  syn- 
dicate operations  or  pools,  and  customers  are  told  of  the  large 
sums  that  have  been  made  in  previous  operations. 

The  Stock  Exchange  wages  relentless  war  on  the 
bucket-shops  and  bogus  brokers,  and  has  tried  in  every 
way  to  deprive  them  of  its  quotations,  but  they  thrive 
in  spite  of  all.  A  new  crop  of  victims  is  harvested  every 
year.  The  sublime  credulity  of  some  people  when  it 
comes  to  investing  their  money  was  signally  illustrated  in 
the  case  of  Miller,  the  520-per-cent. -Franklin-Syndicate 
man,  who  even  after  he  was  sent  to  prison  for  his  swindle 
continued  to  receive  money  from  persons  in  different 
parts  of  the  country,  asking  him  to  invest  it  for  them. 

Senator  Spooner,  in  a  speech  in  the  United  States 
Senate,  declared  "that  dealings  in  the  bucket-shops  con- 
stitute an  insidious  and  destructive  form  of  gambling." 
Yet  Congress,  in  passing  the  war-tax  repeal  bill,  would 
not  retain  the  tax  on  bucket-shops,  which  had  had  the 
effect  of  reducing  their  number. 

There  is  one  way  of  differentiating  between  Stock 
Exchange  and  bogus  brokers.  The  former,  when  they 
advertise,  advertise  only  their  names,  their  business,  and 
their  Exchange  connection.  In  February,  1898,  the  Gov- 
erning Committee  of  the  Stock  Exchange  passed  the  fol- 
lowing resolution: 

RESOLVED,  That,  in  future,  the  publication  of  an  advertisement 
of  other  than  a  strictly  legitimate  business  character  by  a  mem- 
ber of  the  Exchange  shall  be  deemed  an  act  detrimental  to  the 
interest  and  welfare  of  the  Exchange. 

The  London  Stock  Exchange  not  only  prohibits  adver- 


374  WORK  OF  WALL  STREET 

tising  by  members,  but  itself  advertises  the  fact  in  the 
newspapers  as  follows: 

THE  STOCK  EXCHANGE 

NOTICE 

No  Member  of  the  Stock  Exchange  is  allowed  to  advertise  for 
jusiuess  purposes,  or  to  issue  circulars  to  persons  other  than  his 
own  principals. 

Persons  who  advertise  as  Brokers  or  Share  Dealers  are  not 
Members  of  the  Stock  Exchange,  or  under  the  control  of  the 
Committee. 

A  list  of  Members  of  the  Stock  Exchange  who  are  Stock  and 
Share  Brokers  may 'be  seen  at  the  Bartholomew-lane  entrance 
of  the  Bank  of  England,  or  obtained  on  application  to 

EDWAKD    SATTEBTHWAITE, 
Secretary  to  the  Committee  of  the  Stock  Exchange. 

COMMITTEE  ROOM,  THE  STOCK  EXCHANGE,  LONDON,  E.  C. 

This  has  the  effect  of  marking  a  line  of  separation 
between  legitimate  and  illegitimate  brokers  like  that  ex- 
isting between  reputable  doctors,  who  do  not  advertise, 
and  quacks,  who  do. 

The  bogus  broker  and  tipster  fill  the  advertising 
columns  with  their  flamboyant  appeals  to  would-be  spec- 
ulators. Advertising  is  expensive,  but  it  must  pay  them. 
Some  of  the  advertisements  of  the  bogus  brokers  are  in- 
deed masterpieces  of  the  art  of  ad.  writing. 

There  are  two  things  which  a  reputable  broker  or  pro- 
moter or  banker  may  do  in  order  to  protect  himself 
against  the  evil  of  being  identified  in  a  public  way  with 
dishonest  advertisers.  He  may  not  advertise  at  all,  or 
else  advertise  only  in  such  periodicals  as  absolutely  refuse 
any  bogus  "ads"  of  any  description.  Advertising  is  so 
useful,  and  now  almost  indispensable  a  vehicle  of  pub- 
licity, that  to  abandon  that  field  entirely  to  the  dishonest 
seekers  after  other  people's  money  is  a  sacrifice  of  oppor- 


PESTS  OF  WALL  STREET  375 

tunity.  The  thing  to  do  is  to  prevent  advertising  from 
becoming  a  connecting  link  between  a  rascal  and  a  fool, 
and  make  it  a  legitimate  tool  of  enterprise. 

What  the  Hughes  Commission  had  to  say  regarding  the 
abuse  of  advertising  will  be  found  on  page  407, 

Wall  Street  is  too  often  judged  by  these  bogus  brokers, 
dishonest  promoters,  and  tipsters.  If  would  be  fairer  to 
judge  it  by  such  men  of  character  and  faithfulness  to 
trusts  as  the  late  Frederick  D.  Tappen,  of  whom  J.  Ed- 
ward Simmons,  in  a  recent  eulogy,  said: 

Not  all  the  great  battles  of  the  world  are  won  by  the  soldier. 
There  are  generals  in  finance  as  in  war.  There  are  heroes  in 
the  counting-house  as  well  as  on  the  battle-field ;  men  who  for 
honor  and  for  duty  stand  firm,  with  undaunted  courage,  at  the 
post  of  danger  in  the  day  of  trial. 


26 


APPENDIX 

THE  HUGHES  COMMISSION  REPORT,  WITH  NOTES  BY  THE 

AUTHOR 

Notwithstanding  its  great  age,  the  magnitude  of  its 
transactions,  and  the  vast  importance  of  its  market  to  the 
business  of  the  country,  it  was  not  until  1909  that  the 
New  York  Stock  Exchange  was  made  the  subject  of  a 
governmental  investigation.  In  that  year  Governor 
Hughes  of  New  York  appointed  a  commission  to  make  an 
examination  concerning  speculation  in  securities  and 
commodities,  and  he  appointed  as  members  of  this  com- 
mission nine  well-known  citizens,  practical  men  of  affairs 
as  well  as  trained  economists.  The  panic  of  1907.  like 
other  panics,  had  its  starting  point  in  Wall  Street,  and 
the  sharp  and  calamitous  decline  in  prices  of  securities 
produced  a  feeling  of  antagonism  to  the  Stock  Exchange, 
an  antagonism  which  was  in  part  the  result  of  certain  ex- 
ceptional speculative  developments  shameful  in  their 
character  and  injurious  in  their  effects,  and  in  part  the 
result  of  political  and  'demagogical  agitation.  The 
Hughes  Commission  was  apparently  appointed  for  the 
purpose,  first  of  determining  what  justification  existed 
for  an  organized  market,  where  speculation  could  be  car- 
ried on,  and  second  of  correcting  such  evils  as  might 
exist. 

The  report  of  this  Commission,  which  bore  date  of  June 
7,  1909,  is  the  most  important  document  relating  to  spec- 
ulation in  securities  and  commodities  which  has  ever 
been  issued  in  the  United  States.  It  takes  rank  with  the 
report  of  the  Royal  Commission  which  in  1877  made  a 
similar  inquiry  into  the  methods  of  the  London  Stock 
Exchange. 

376 


THE  HUGHES  COMMISSION  REPORT  377 

The  report  of  the  Hughes  Commission  has  already  had 
the  two-fold  effect  of  causing  the  Stock  Exchange  to 
make  material  changes  in  its  rules  for  strengthening  the 
safeguards  thrown  around  its  market,  and  of  modifying 
and  correcting  public  opinion  in  regard  to  the  economic 
soundness  and  value  of  speculation.  So  important  and 
so  comprehensive  is  the  report  that  it  appears  necessary 
to  reproduce  it  in  full  in  this  description  of  the  "Wall 
Street  system.  The  report  is  as  follows,  the  portions  in 
brackets  being  notes  by  the  author  intended  especially  to 
show  the  subsequent  action  of  the  Stock  Exchange  with 
regard  to  the  various  recommendations. 

New  York,  June  7,  1909. 
Hon.  Charles  E.  Hughes,   Governor,  Albany,  N.  Y. 

Dear  Sir :  The  committee  appointed  by  you  on  December  14, 
1908,  to  endeavor  to  ascertain 

"what  changes,  if  any,  are  advisable  in  the  laws  of  the  State  bear- 
ing upon  speculation  in  securities  and  commodities,  or  relation  to 
the  protection  of  investors,  or  with  regard  to  the  instrumentalities 
and  organizations  used  in  dealings  in  securities  and  commodities 
which  are  the  subject  of  speculation," 
beg  leave  to  submit  the  following  report : 

We  have  invited  statements  from  those  engaged  in  speculation 
and  qualified  to  discuss  its  phases ;  we  have  taken  testimony  of- 
fered from  various  sources  as  to  its  objectionable  features ;  we 
have  considered  the  experience  of  American  States  and  of  for- 
eign countries  in  their  efforts  to  regulate  speculative  operations. 
In  our  inquiry  we  have  been  aided  by  the  officials  of  the  various 
exchanges,  who  have  expressed  their  views  both  orally  and  in 
writing,  and  have  afforded  us  access  to  their  records. 

THE   SUBJECT  IN    GENERAL 

Markets  have  sprung  into  being  wherever  buying  and  selling 
have  been  conducted  on  a  large  scale.  Taken  in  charge  by  regu- 
lar organizations  and  controlled  by  rules,  such  markets  become 
exchanges.  In  New  York  city  there  are  two  exchanges  dealing 
in  securities  and  seven  in  commodities.  In  addition  there  is  a 
security  market,  without  fixed  membership  or  regular  officers, 


378  APPENDIX 

known  as  the  "Curb."  The  exchanges  dealing  in  commodities  are 
incorporated,  while  those  dealing  in  securities  are  not. 

Commodities  are  not  held  for  permanent  investment,  but  are 
bought  and  sold  primarily  for  the  purpose  of  commercial  distribu- 
tion ;  on  the  other  hand,  securities  are  primarily  held  for  invest- 
ment;  but  both  are  subjects  of  speculation.  Speculation  consists 
in  forecasting  changes  of  value  and  buying  or  selling  in  order  to 
take  advantage  of  them ;  it  may  be  wholly  legitimate,  pure  gam- 
bling, or  something  partaking  of  the  qualities  of  both.  In  some 
form  it  is  a  necessary  incident  of  productive  operations.  When 
carried  on  in  connection  with  either  commodities  or  securities  it 
tends  to  steady  their  prices.  Where  speculation  is  free,  fluctua- 
tions in  prices,  otherwise  violent  and  disastrous,  ordinarily  be- 
come gradual  and  comparatively  harmless.  Moreover,  so  far  as 
commodities  are  concerned,  in  the  absence  of  speculation,  mer- 
chants and  manufacturers  would  themselves  be  forced  to  carry 
the  risks  involved  in  changes  of  prices  and  to  bear  them  in  the 
intensified  condition  resulting  from  sudden  and  violent  fluctua- 
tions in  value.  Risks  of  this  kind  which  merchants  and  manu- 
facturers still  have  to  assume  are  reduced  in  amount,  because  of 
the  speculation  prevailing ;  and  many  of  these  milder  risks  they 
are  enabled,  by  "hedging,"  to  transfer  to  others.  For  the  mer- 
chant or  manufacturer  the  speculator  performs  a  service  which 
has  the  effect  of  insurance. 

In  law.  speculation  becomes  gambling  when  the  trading  which 
it  involves  does  not  lead,  and  is  not  intended  to  lead,  to  the  actual 
passing  from  hand  to  hand  of  the  property  that  is  dealt  in.  Thus, 
in  the  recent  case  of  Kurd  vs.  Taylor  (181  N.  Y.,  231),  the  Court 
of  Appeals  of  New  Tork  said : 

"The  law  of  this  State  as  to  the  purchase  and  sale  of  stocks 
is  well  settled.  The  purchase  of  stocks  through  a  broker,  though 
the  party  ordering  such  purchase  does  not  intend  to  hold  the 
stocks  as  an  investment,  but  expects  the  broker  to  carry  them 
for  him  with  the  design  on  the  part  of  the  purchaser  to  sell 
again  the  stocks  when  their  market  value  has  enhanced  is,  how- 
ever, speculative,  entirely  legal.  Equally  so  is  a  'short  sale,' 
where  the  seller  has  not  the  stock  he  assumes  to  sell,  but  borrows 
it  and  expects  to  replace  it  when  the  market  value  has  declined. 
But  to  make  such  transactions  legal,  they  must  contemplate  an 
actual  purchase  or  an  actual  sale  of  stocks  by  the  broker,  or 
through  him.  If  the  intention  is  that  the  so-called  broker  shall 
pay  his  customer  the  difference  between  the  market  price  at  which 


THE  HUGHES  COMMISSION  REPORT  379 

the  stocks  were  ordered  purchased  and  that  at  which  they  were 
ordered  sold,  in  case  such  fluctuation  is  in  favor  of  the  customer, 
or  that  in  case  it  is  against  the  customer,  the  customer  shall  pay 
the  broker  that  difference,  no  purchases  or  sales  being  made,  the 
transaction  is  a  wager  and  therefore  illegal.  Such  business  is 
merely  gambling,  in  which  the  so-called  commission  for  purchases 
and  sales  that  are  never  made  is  simply  the  percentage  which  in 
other  gambling  games  is  reserved  in  favor  of  the  keeper  of  the 
establishment." 

This  is  also  the  law  respecting  commodity  transactions. 

The  rules  of  all  the  exchanges  forbid  gambling  as  defined  by 
this  opinion ;  but  they  make  so  easy  a  technical  delivery  of  the 
property  contracted  for,  that  the  practical  effect  of  much  specu- 
lation, in  point  of  form  legitimate,  is  not  greatly  different  from 
that  of  gambling.  Contracts  to  buy  may  be  privately  offset  by 
contracts  to  sell.  The  offsetting  may  be  done,  in  a  systematic 
way,  by  clearing-houses,  or  by  "ring  settlements."  Where  de- 
liveries are  actually  made,  property  may  be  temporarily  bor- 
rowed for  the  purpose.  In  these  ways,  speculation  which  has 
the  legal  traits  of  legitimate  dealing  may  go  on  almost  as  freely 
as  mere  wagering,  and  may  have  most  of  the  pecuniary  and  im- 
moral effects  of  gambling  on  a  large  scale. 

A  real  distinction  exists  between  speculation  which  is  carried 
on  by  persons  of  means  and  experience,  and  based  on  an  intelli- 
gent forecast,  and  that  which  is  carried  on  by  persons  without 
these  qualifications.  The  former  is  closely  connected  with  regular 
business.  While  not  unaccompanied  by  waste  and  loss,  this 
speculation  accomplishes  an  amount  of  good  which  offsets  much 
of  its  cost.  The  latter  does  but  a  small  amount  of  good  and 
an  almost  incalculable  amount  of  evil.  In  its  nature  it  is  in  the 
same  class  with  gambling  upon  the  race-track  or  at  the  roulette 
table,  but  is  practised  on  a  vastly  larger  scale.  Its  ramifications 
extend  to  all  parts  of  the  country.  It  involves  a  practical  cer- 
tainty of  loss  to  those  who  engage  in  it.  A  continuous  stream 
of  wealth,  taken  from  the  actual  capital  of  innumerable  persons 
of  relatively  small  means,  swells  the  income  of  brokers  and  oper- 
ators dependent  on  this  class  of  business ;  and  insofar  as  it  is 
consumed  like  most  income,  it  represents  a  waste  of  capital. 
The  total  amount  of  this  waste  is  rudely  indicated  by  the  obvious 
cost  of  the  vast  mechanism  of  brokerage  and  by  manipulators' 
gains,  of  both  of  which  it  is  a  large  constituent  element.  But 
for  a  continuous  influx  of  new  customers,  replacing  those  whose 


380  APPENDIX 

losses  force  them  out  of  the  "street,"  this  costly  mechanism  of 
speculation  could  not  be  maintained  on  anything  like  its  present 
scale. 

THE    PROBLEM     TO    BE     SOLVED 

The  problem,  wherever  speculation  is  strongly  rooted,  is  to 
eliminate  that  which  is  wasteful  and  morally  destructive,  while 
retaining  and  allowing  free  play  to  that  which  is  beneficial.  The 
difficulty  in  the  solution  of  the  problem  lies  in  the  practical  im- 
possibility of  distinguishing  what  is  virtually  gambling  from  le- 
gitimate speculation.  The  most  fruitful  policy  will  be  found 
in  measures  which  will  lessen  speculation  by  persons  not  quali- 
fied to  engage  in  it  In  carrying  out  such  a  policy  exchanges 
can  accomplish  more  than  legislatures.  In  connection  with  our 
reports  on  the  different  exchanges,  as  well  as  on  the  field  of 
investment  and  speculation  which  lies  outside  of  the  exchanges, 
we  shall  make  recommendations  directed  to  the  removal  of  vari- 
ous evils  now  existing  and  to  the  reduction  of  the  volume  of 
speculation  of  the  gambling  type. 

THE    NEW    YORK    STOCK    EXCHANGE 

The  New  York  Stock  Exchange  is  a  voluntary  association, 
limited  to  1,100  members,  of  whom  about  700  are  active,  some 
of  them  residents  of  other  cities.  Memberships  are  sold  for 
about  $80,000.  The  Exchange  as  such  does  no  business,  merely 
providing  facilities  to  members  and  regulating  their  conduct. 
The  governing  power  is  in  an  elected  committee  of  forty  members 
and  is  plenary  in  scope.  The  business  transacted  on  the  floor 
is  the  purchase  and  sale  of  stocks  and  bonds  of  corporations 
and  governments.  Practically  all  transactions  must  be  completed 
by  delivery  and  payment  on  the  following  day. 

The  mechanism  of  the  Exchange,  provided  by  its  constitution 
and  rules,  is  the  evolution  of  more  than  a  century.  An  or- 
ganization of  stock-brokers  existed  here  in  1792,  acquiring  more 
definite  form  in  1817.  It  seems  certain  that  for  a  long  period 
the  members  were  brokers  or  agents  only ;  at  the  present  time 
many  are  principals  as  well  as  agents,  trading  for  themselves 
as  well  as  for  their  customers.  A  number  of  prominent  capital- 
ists hold  memberships  merely  for  the  purpose  of  availing  them- 
selves of  the  reduced  commission  charge  which  the  rules  author- 
ize between  members. 

The  volume  of  transactions  indicates  that  the  Exchange  is 
to-day  probably  the  most  important  financial  institution  in  the 


THE  HUGHES  COMMISSION  REPORT  381 

world.  In  the  past  decade  the  average  annual  sales  of  shares 
have  been  196,500,000  at  prices  involving  an  annual  average  turn- 
over of  nearly  $15,500,000,000 ;  bond  transactions  averaged  about 
$800,000,000.  This  enormous  business  affects  the  financial  and 
credit  interests  of  the  country  in  so  large  a  measure  that  its 
proper  regulation  is  a  matter  of  transcendent  importance.  While 
radical  changes  in  the  mechanism,  which  is  now  so  nicely  ad- 
justed that  the  transactions  are  carried  on  with  the  minimum  of 
friction,  might  prove  disastrous  to  the  whole  country,  never- 
theless measures  should  be  adopted  to  correct  existing  abuses. 

PATBONS  OF  THE  EXCHANGE 

The  patrons  of  the  Exchange  may  be  divided  into  the  following 
groups : 

(1.)  Investors,  who  personally  examine  the  facts  relating  to 
the  value  of  securities-  or  act  on  the  advice  of  reputable  and  ex- 
perienced financiers,  and  pay  in  full  for  what  they  buy. 

(2.)  Manipulators,  whose  connection  with  corporations  issu- 
ing or  controlling  particular  securities  enables  them  under  cer- 
tain circumstances  to  move  the  prices  up  or  down,  and  who  are 
thus  in  some  degree  protected  from  dangers  encountered  by  other 
speculators. 

(3.)  Floor  traders,  who  keenly  study  the  markets  and  the 
general  conditions  of  business,  and  acquire  early  information 
concerning  the  changes  which  affect  the  values  of  securities. 
From  their  familiarity  with  the  technique  of  dealings  on  the 
Exchange,  and  ability  to  act  in  concert  with  others,  and  thus 
manipulate  values,  they  are  supposed  to  have  special  advan- 
tages over  other  traders. 

(4.)  Outside  operators  having  capital,  experience,  and  knowl- 
edge of  the  general  conditions  of  business.  Testimony  is  clear 
as  to  the  result  which,  in  the  long  run,  attends  their  operations ; 
commissions  and  interest  charges  constitute  a  factor  always 
working  against  them.  Since  good  luck  and  bad  luck  alternate 
in  time,  the  gains  only  stimulate  these  men  to  larger  ventures, 
and  they  persist  in  them  till  a  serious  or  ruinous  loss  forces 
them  out  of  the  "Street." 

(5.)  Inexperienced  persons,  who  act  on  intierested  advice, 
"tips,"  advertisements  in  newspapers,  or  circulars  sent  by  mail, 
or  "take  flyers"  in  absolute  ignorance,  and  with  blind  confidence 
in  their  luck.  Almost  without  exception  they  eventually  lose. 


382  APPENDIX 

CHARACTER    OF    TRANSACTIONS 

It  is  unquestionable  that  only  a  small  part  of  the  transactions 
upon  the  Exchange  is  of  an  investment  character ;  a  substantial 
part  may  be  characterized  as  virtually  gambling.  Yet  we  are 
unable  to  see  how  the  State  could  distinguish  by  law  between 
proper  and  improper  transactions,  since  the  forms  and  the 
mechanisms  used  are  identical.  Rigid  statutes  directed  against 
the  latter  would  seriously  interfere  with  the  former.  The  ex- 
perience of  Germany  with  similar  legislation  is  illuminating. 
But  the  Exchange,  with  the  plenary  power  over  members  and 
their  operations,  could  provide  correctives,  as  we  shall  show. 

MARGIN    TRADING 

Purchasing  securities  on  margin  is  as  legitimate  a  transaction 
as  a  purchase  of  any  other  property  in  which  part  payment  is 
deferred.  We  therefore  see  no  reason  whatsoever  for  recom- 
mending the  radical  change  suggested,  that  margin  trading  be 
prohibited. 

Two  practices  are  prolific  of  losses,  namely,  buying  active 
securities  on  small  margins  and  buying  unsound  securities,  pay- 
ing for  them  in  full.  The  losses  in  the  former  case  are  due 
to  the  quick  turns  in  the  market,  to  which  active  stocks  are 
sxibject;  these  exhaust  the  margins  and  call  for  more  money 
than  the  purchasers  can  supply.  The  losses  in  the  latter  case  are 
largely  due  to  misrepresentations  of  interested  parties  and  un- 
scrupulous manipulations. 

To  correct  the  evils  of  misrepresentation  and  manipulation, 
we  shall  offer  in  another  part  of  this  report  certain  recommenda- 
tions. Insofar  as  losses  are  due  to  insufficient  margins,  they 
would  be  materially  reduced  if  the  customary  percentage  of  mar- 
gins were  increased.  The  amount  of  margin  which  a  broker  re- 
quires from  a  speculative  buyer  of  stocks  depends,  in  each  case, 
on  the  credit  of  the  buyer;  and  the  amount  of  credit  which  one 
person  may  extend  to  another  is  a  dangerous  subject  on  which 
to  legislate.  Upon  the  other  hand,  a  rule  made  by  the  Exchange 
could  safely  deal  with  the  prevalent  rate  of  margins  required 
from  customers.  In  preference,  therefore,  to  recommending  legis- 
lation, we  urge  upon  all  brokers  to  discourage  speculation  upon 
small  margins  and  upon  the  Exchange  to  use  its  influence,  and, 
If  necessary,  its  power,  to  prevent  members  from  soliciting  and 
generally  accepting  business  on  a  less  margin  than  20  per  cent. 


THE  HUGHES  COMMISSION  REPORT  383 

[Yet  William  J.  Bryan  once  said  to  the  author  that  he 
"insulted  his  (Mr.  Bryan's)  intelligence"  by  asserting 
that  there  was  no  essential  difference  in  buying  stocks  on 
credit  than  in  buying  real  estate  on  credit.] 

PYRAMIDING 

"Pyramiding,"  which  is  the  use  of  paper  profits  in  stock  transac- 
tions as  a  margin  for  further  commitments,  should  be  discour- 
aged. The  practice  tends  to  produce  more  extreme  fluctuations 
and  more  rapid  wiping  out  of  margins.  If  the  stock-brokers  and 
the  banks  would  make  it  a  rule  to  value  securities  for  the  pur- 
pose of  margin  or  collateral,  not  at  the  current  price  of  the 
moment,  but  at  the  average  price  of,  say,  the  previous  two  or 
three  months  (provided  that  such  average  price  were  not  higher 
than  the  price  of  the  moment),  the  dangers  of  pyramiding  would 
be  largely  prevented. 

SHORT-SELLING 

We  have  been  strongly  urged  to  advise  the  prohibition  or  limi- 
tation of  short  sales,  not  only  on  the  theory  that  it  is  wrong  to 
agree  to  sell  what  one  does  not  possess,  but  that  such  sales  re- 
duce the  market  price  of  the  securities  involved.  We  do  not 
think  that  it  is  wrong  to  agree  to  sell  something  that  one  does 
not  now  possess,  but  expects  to  obtain  later.  Contracts  and 
agreements  to  sell,  and  deliver  in  the  future,  property  which  one 
does  not  possess  at  the  time  of  the  contract,  are  common  in 
all  kinds  of  business.  The  man  who  has  "sold  short"  must  some 
day  buy  in  order  to  return  the  stock  which  he  has  borrowed  to 
make  the  short  sale.  Short-sellers  endeavor  to  select  times  when 
prices  seem  high  in  order  to  sell,  and  times  when  prices  seem 
low  in  order  to  buy,  their  action  in  both  cases  serving  to  lessen 
advances  and  diminish  declines  of  price.  In  other  words,  short- 
selling  tends  to  produce  steadiness  in  prices,  which  is  an  advan- 
tage to  the  community.  No  other  means  of  restraining  unwar- 
ranted marking  up  and  down  of  prices  has  been  suggested  to  us. 

The  legislation  of  the  State  of  New  York  on  the  subject  of 
short-selling  is  significant.  In  1812  the  Legislature  passed  a 
law  declaring  all  contracts  for  the  sale  of  stocks  and  bonds  void, 
unless  the  seller  at  the  time  was  the  actual  owner  or  assignee 
thereof  or  authorized  by  such  owner  or  assignee  to  sell  the  same. 


384  APPENDIX 

In  1858  this  act  was  repealed  by  a  statute  now  In  force,  which 
reads  as  follows: 

"An  agreement  for  the  purchase,  sale,  transfer  or  delivery  of 
a  certificate  or  other  evidence  of  debt,  issued  by  the  United  States 
or  by  any  State,  or  municipal  or  other  corporation,  or  any  share 
or  Interest  in  the  stock  of  any  bank,  corporation,  or  joint-stock 
association,  Incorporated  or  organized  under  the  laws  of  the 
United  States  or  of  any  State,  is  not  void,  or  voidable,  because 
the  vendor,  at  the  time  of  making  such  contract,  is  not  the  owner 
or  possessor  of  the  certificate,  or  certificates,  or  other  evidence 
of  debt,  share  or  interest." 

It  has  been  urged  that  this  statute  "specifically  legalizes  stock 
gambling."  As  a  matter  of  fact,  however,  the  law  would  be  pre- 
cisely the  same  if  that  statute  were  repealed,  for  it  is  the  well- 
settled  common  law  of  this  country,  as -established  by  the  de- 
cisions of  the  Supreme  Court  of  the  United  States  and  of  the 
State  courts,  that  all  contracts,  other  than  mere  wagering  con- 
tracts, for  the  future  purchase  or  sale  of  securities  or  commodi- 
ties are  valid,  whether  the  vendor  is,  or  is  not,  at  the  time  of 
making  such  contract,  the  owner  or  possessor  of  the  securities 
or  commodities  involved,  in  the  absence  of  a  statute  making 
such  contracts  illegal.  So  far  as  any  of  these  transactions  are 
mere  wagering  transactions,  they  are  illegal,  and  not  enforce- 
able, as  the  law  now  stands. 

It  has  been  suggested  to  us  that  there  should  be  a  requirement 
either  by  law  or  by  rule  of  the  Stock  Exchange,  that  no  one 
should  sell  any  security  without  identifying  it  by  number  or  other- 
wise. Such  a  rule  would  cause  great  practical  difficulties  in  the 
case  of  securities  not  present  in  New  York  at  the  time  when  the 
owner  desires  to  sell  them,  and  would  increase  the  labor  and 
cost  of  doing  business.  But,  even  if  this  were  not  the  effect, 
the  plan  contemplates  a  restriction  upon  short  sales,  which,  for 
the  reasons  set  forth  above,  seems  to  us  undesirable.  It  is  true 
that  this  identification  plan  exists  in  England  as  to  sales  of  bank 
shares  (Leeman  act  of  18G7)  ;  but  it  has  proved  a  dead  letter. 
It  has  also  been  used  in  times  of  apprehended  panic  upon  the 
French  Bourse,  but  opinions  in  regard  to  its  effect  there  are 
conflicting.  While  some  contend  that  it  has  been  useful  in  pre- 
venting panics,  others  affirm  that  it  has  been  used  simply  for 
the  purpose  of  protecting  bankers  who  were  loaded  down  with 
certain  securities  which  they  were  trying  to  distribute,  and  who, 


THE  HUGHES  COMMISSION  REPORT  385 

through   political    influence,   procured   the   adoption    of   the    rule 
for  their  special  benefit. 

[If  short  selling  had  been  prohibited,  the  panic  of  1907, 
as  was  shown  in  a  preceding  chapter,  would  have  been  a 
disaster  ten  times  more  calamitous  than  it  actually  was. 
The  only  buying  then  came  from  speculators  who  had 
previously  sold  short  and  who  now  appeared  to  "cover" 
at  the  lower  prices.  Their  buying  checked  the  decline, 
and  thus  kept  the  financial  structure  from  collapsing. 
There  could  be  no  better  illustration  of  the  value  of  spec- 
ulation in  its  power  to  prevent  too  great  price  fluctua- 
tion.] 

MANIPULATION    OF   PRICES 

A  subject  to  which  we  have  devoted  much  time  and  thought 
is  that  of  the  manipulation  of  prices  by  large  interests.  This 
falls  into  two  general  classes : 

(1.)  That  which  is  resorted  to  for  the  purpose  of  making  a 
market  for  issues  of  new  securities. 

(2.)  That  which  is  designed  to  serve  merely  speculative  pur- 
poses in  the  endeavor  to  make  a  profit  as  the  result  of  fluctua- 
tions which  have  been  planned  in  advance. 

The  first  kind  of  manipulation  has  certain  advantages,  and 
when  not  accompanied  by  "matched  orders"  is  unobjectionable 
per  se.  It  is  essential  to  the  organization  and  carrying  through 
of  important  enterprises,  such  as  large  corporations,  that  the  or- 
ganizers should  be  able  to  raise  the  money  necessary  to  complete 
them.  This  can  be  done  only  by  the  sale  of  securities.  Large 
blocks  of  securities,  such  as  are  frequently  issued  by  railroad  and 
other  companies,  cannot  be  sold  over  the  counter  or  directly  to 
the  ultimate  investor,  whose  confidence  in  them  can,  as  a  rule, 
be  only  gradually  established.  They  must  therefore,  if  sold  at 
all,  be  disposed  of  to  some  syndicate,  who  will  in  turn  pass  them 
on  to  middlemen  or  speculators,  until,  in  the  course  of  time,  they 
find  their  way  into  the  boxes  of  investors.  But  prudent  in- 
vestors are  not  likely  to  be  induced  to  buy  securities  which  are 
not  regularly  quoted  on  some  exchange,  and  which  they  cannot 
sell,  or  on  which  they  cannot  borrow  money  at  their  pleasure. 
If  the  securities  are  really  good  and  bids  and  offers  bona-fide, 


386  APPENDIX 

open  to  all  sellers  and  buyers,  the  operation  Is  harmless.  It  is 
merely  a  method  of  bringing  new  investments  into  public  notice. 
The  second  kind  of  manipulation  mentioned  is  undoubtedly 
open  to  serious  criticism.  It  has  for  its  object  either  the  crea- 
tion of  high  prices  for  particular  stocks,  in  order  to  draw  in  the 
public  as  buyers  and  to  unload  upon  them  the  holdings  of  the 
operators,  or  to  depress  the  prices  and  induce  the  public  to  sell. 
There  have  been  instances  of  gross  and  unjustifiable  manipula- 
tion of  securities,  as  in  the  case  of  American  Ice  stock.  While 
we  have  been  unable  to  discover  any  complete  remedy  short  of 
abolishing  the  Stock  Exchange  itself,  we  are  convinced  that  the 
Exchange  can  prevent  the  worst  forms  of  this  evil  by  exercising 
its  influence  and  authority  over  the  members  to  prevent  them. 
When  continued  manipulation  exists  it  is  patent  to  experienced 
observers. 

[The  degree  to  which  manipulation  is  resorted  to  in  the 
stock-market  is  a  matter  of  some  dispute.  The  author 
holds  that  it  has  often  been  practised  in  the  past,  having 
been  at  many  times  a  vital  factor  in  determining  prices. 
So  good  an  authority  as  Thomas  F.  Woodlock,  however, 
claims  that  "it  is  at  this  time  an  auxiliary  factor  to  a 
small  extent."  The  distinction  which  the  Hughes  Com- 
mission draws  between  two  classes  of  manipulation  is  en- 
tirely just.  There  is  a  kind  of  manipulation  which  is 
practically  market  leadership,  which  consists  in  the  mar- 
shaling of  all  legitimate  influences  in  such  a  way  as  to 
cause  the  market  to  express  in  its  quotations  a  change  in 
economic  conditions  which  has  not  yet  made  its  impress 
on  the  state  of  trade  or  the  volume  of  traffic.  This  kind 
of  manipulation  is  as  proper  as  the  organization  of  public 
opinion  in  political  campaigns.  The  other  and  grosser 
forms  of  manipulation  are  of  course  of  a  criminal  nature. 
They  are  a  method  of  extracting  money  from  other 
people  by  methods  of  deceit.] 

"WASH   SALES"  AND  "MATCHED  OBDEBS" 

In  the  foregoing  discussion  we  have  confined  ourselves  to  bona- 
flde  sales.    So  far  as  manipulation  of  either  class  is  based  upon 


THE  HUGHES  COMMISSION  REPORT  387 

fictitious  or  so-called  "wash  sales,"  it  is  open  to  the  severest 
condemnation,  and  should  be  prevented  by  all  possible  means. 
These  fictitious  sales  are  forbidden  by  the  rules  of  all  the  reg- 
ular exchanges,  and  are  not  enforceable  at  law.  They  are  less 
frequent  than  many  persons  suppose.  A  transaction  must  take 
place  upon  the  floor  of  the  Exchange  to  be  reported,  and  if  not 
reported  does  not  serve  the  purpose  of  those  who  engage  in  it. 
If  it  takes  place  on  the  floor  of  the  Exchange,  but  is  purely  a 
pretence,  the  brokers  involved  run  the  risk  of  detection  and  ex- 
pulsion, which  is  to  them  a  sentence  of  financial  death.  There 
is,  however,  another  class  of  transactions  called  "matched  orders," 
which  differ  materially  from  those  already  mentioned,  in  that 
they  are  actual  and  enforceable  contracts.  We  refer  to  that  class 
of  transactions,  engineered  by  some  manipulator,  who  sends  a 
number  of  orders  simultaneously  to  different  brokers,  some  to 
buy  and  some  to  sell.  These  brokers,  without  knowing  that 
other  brokers  have  countervailing  orders  from  the  same  principal, 
execute  their  orders  upon  the  floor  of  the  Exchange,  and  the 
transactions  become  binding  contracts ;  they  cause  an  appearance 
of  activity  in  a  certain  security  which  is  unreal.  Since  they  are 
legal  and  binding,  we  find  a  difficulty  in  suggesting  a  legislative 
remedy.  But  where  the  activities  of  two  or  more  brokers  in 
certain  securities  become  so  extreme  as  to  indicate  manipulation 
rather  than  genuine  transactions,  the  officers  of  the  Exchange 
would  be  remiss  unless  they  exercised  their  influence  and  author- 
ity upon  such  members  in  a  way  to  cause  them  to  desist  from 
such  suspicious  and  undesirable  activity.  As  already  stated, 
instances  of  continuous  manipulation  of  particular  securities  are 
patent  to  every  experienced  observer,  and  could  without  difficulty 
be  discouraged,  if  not  prevented,  by  prompt  action  on  the  part 
of  the  Exchange  authorities. 


The  subject  of  corners  in  the  Stock-Market  has  engaged  our 
attention.  The  Stock  Exchange  might  properly  adopt  a  rule  pro- 
viding that  the  governors  shall  have  power  to  decide  when  a 
corner  exists  and  to  fix  a  settlement  price,  so  as  to  relieve  inno- 
cent persons  from  the  injury  or  ruin  which  may  result  therefrom. 
The  mere  existence  of  such  a  rule  would  tend  to  prevent  corners. 

[With  the  creation  of  big  corporations  having  enor- 
mous issues  of  stocks  and  with  the  wide  distribution  of 


388  APPENDIX 

the  ownership  of  these  stocks  the  opportunity  of  corner- 
ing has  been  reduced  to  a  minimum  and  corners  are  no 
longer  as  frequent  on  the  Stock  Exchange  as  in  former 
years.  The  last  great  corner  was  that  in  the  Northern 
Pacific  stock  in  1901  and  was  not  the  result  of  any  manip- 
ulative design  to  corner  the  stock,  but  was  brought  about 
by  a  contest  for  control.] 

FAILURES    AND    EXAMINATION    OF   BOOKS 

We  have  taken  testimony  on  the  subject  of  recent  failures  of 
brokers,  where  It  has  been  discovered  that  they  were  insolvent 
for  a  long  period  prior  to  their  public  declaration  of  failure, 
and  where  their  activities  after  their  insolvency  not  only  caused 
great  loss  to  their  customers,  but  also,  owing  to  their  efforts  to 
save  themselves  from  bankruptcy,  worked  great  injury  to  inno- 
cent outsiders.  For  cases  of  this  character,  there  should  be  a 
law  analogous  to  that  forbidding  banks  to  accept  deposits  after 
insolvency  is  known ;  and  we  recommend  that  a  statute  making 
it  a  misdemeanor  for  a  broker  to  receive  any  securities  or  cash 
from  any  customer  (except  in  liquidating  or  fortifying  an  exist- 
ing account),  or  to  make  any  further  purchases  or  sales  for  his 
own  account,  after  he  has  become  insolvent ;  with  the  provision 
that  a  broker  shall  be  deemed  insolvent  when  he  has  on  his  books 
an  account  or  accounts  which,  if  liquidated,  would  exhaust  his 
assets,  unless  he  can  show  that  he  had  reasonable  ground  to 
believe  that  such  accounts  were  good. 

The  advisability  of  requiring  by  State  authority  an  examination 
of  the  books  of  all  members  of  the  Exchange,  analogous  to*  that 
required  of  banks,  has  been  urged  upon  us.  Doubtless  some  fail- 
ures would  be  prevented  by  such  a  system  rigidly  enforced,  al- 
though bank  failures  do  occur  in  spite  of  the  scrutiny  of  the 
examiners.  Yet  the  relations  between  brokers  and  their  cus- 
tomers are  of  so  confidential  a  nature  that  we  do  not  recommend 
an  examination  of  their  books  by  any  public  authority.  The 
books  and  accounts  of  the  members  of  the  Exchange  should, 
however,  be  subjected  to  periodic  examination  and  inspection  pur- 
suant to  rules  and  regulations  to  be  prescribed  by  the  Exchange, 
and  the  result  should  be  promptly  reported  to  the  governors 
thereof. 

It  is   vain  to   say   that  a   body  possessing  the  powers  of  the 


THE  HUGHES  COMMISSION  REPORT  389 

board  of  governors  of  the  Exchange,  familiar  with  every  detail 
of  the  mechanism,  generally  acquainted  with  the  characteristics 
of  members,  cannot  improve  present  conditions.  It  is  a  deplor- 
able fact  that  with  all  their  power  and  ability  to  be  informed, 
it  is  generally  only  after  a  member  or  a  firm  is  overtaken  by 
disaster,  involving  scores  or  hundreds  of  innocent  persons,  and 
causing  serious  disturbances,  that  the  Exchange  authorities  take 
action.  No  complaint  can  be  registered  against  the  severity  of 
the  punishment  then  meted  out ;  but  in  most  cases  the  wrong- 
doing thus  atoned  for,  which  has  been  going  on  for  a  consid- 
erable period,  might  have  been  discovered  under  a  proper  system 
of  supervision,  and  the  vastly  preponderant  value  of  prevention 
over  cure  demonstrated. 

[Members  of  the  Stock  Exchange  hold  that  a  rule  pro- 
viding for  general  inspection  of  accounts  and  books  of 
members  would  partake  of  the  nature  of  an  inquisition, 
and  would  be  bitterly  opposed.  They  hold  also  that  such 
a  rule  would  not  produce  the  desired  results.  The  Ex- 
change, however,  has  a  committee  empowered  to  examine 
into  the  dealings  of  any  member.  On  April  21,  1910,  the 
Governing  Committee  of  the  Exchange  adopted  the  fol- 
lowing amendment  to  the  Constitution:  "A  Law  Com- 
mittee to  consist  of  five  members,  to  which  shall  be  re- 
ferred all  questions  of  law  affecting  the  interests  of  the 
Exchange.  It  shall  act  in  an  advisory  capacity  to  the 
President,  when  requested,  represent  the  Exchange  in  con- 
ferences  with  other  interests,  and  is  authorized  and 
empowered,  whenever  the  Committee  shall  deem  it  to  be 
for  the  interest  of  the  Exchange,  to  examine  into  the 
dealings  of  any  member  of  the  Exchange."] 

EEHYPOTHECATION     OF     SECUBITIES 

We  have  also  considered  the  subject  of  rehypothecating,  loan- 
ing, and  other  use  of  securities  by  brokers  who  hold  them  for 
customers.  So  far  as  any  broker  applies  to  his  own  use  any 
securities  belonging  to  a  customer,  or  hypothecates  them  for  a 
greater  amount  than  the  unpaid  balance  of  the  purchase  price, 
without  the  customer's  consent,  he  is  undoubtedly  guilty  of  a 


390  APPENDIX 

conversion  under  the  law  as  it  exists  to-day,  and  we  call  this 
fact  to  the  attention  of  brokers  and  the  public.  When  a  broker 
sells  the  securities  purchased  for  a  customer  who  has  paid  there- 
for in  whole  or  in  part,  except  upon  the  customer's  default,  or 
disuses  of  them  for  his  own  benefit,  he  should  be  held  guilty 
of  larceny,  and  we  recommend  a  statute  to  that  effect. 

DEALING    FOB   CLEBKS 

The  Exchange  now  has  a  rule  forbidding  any  member  to  deal 
or  carry  an  account  for  a  clerk  or  employe  of  any  other  mem- 
ber. This  rule  should  be  extended  so  as  to  prevent  dealing  for 
account  of  any  clerk  or  subordinate  employs  of  any  bank,  trust 
company,  insurance  company,  or  other  moneyed  corporation  or 
banker. 

[The  recommendation  of  the  Hughes  Commission  was 
adopted  by  the  Stock  Exchange  on  April  4,  1910.  The 
resolution  is  as  follows:  "Resolved,  That  the  taking 
or  carrying  of  a  speculative  account,  or  the  making 
of  a  speculative  transaction,  in  which  a  clerk  of 
the  Exchange,  or  of  a  member  of  the  Exchange,  or  of  a 
bank,  trust  company,  banker  or  insurance  company,  is 
directly  or  indirectly  interested,  unless  the  written  con- 
sent of  the  employer  has  been  first  obtained,  shall  be 
deemed  an  act  detrimental  to  the  interest  and  welfare 
of  the  Exchange."] 

LISTING    REQUIBEMENTS 

Before  securities  can  be  bought  and  sold  on  the  Exchange,  they 
must  be  examined.  The  committee  on  Stock  List  is  one  of  the 
most  important  parts  of  the  organization,  since  public  confidence 
depends  upon  the  honesty,  impartiality,  and  thoroughness  of  its 
work.  While  the  Exchange  does  not  guarantee  the  character 
of  any  securities,  or  affirm  that  the  statements  filed  by  the  pro- 
moters are  true,  it  certifies  that  due  diligence  and  caution  have 
been  used  by  experienced  men  in  examining  them.  Admission 
to  the  list,  therefore,  establishes  a  presumption  in  favor  of  the 
soundness  of  the  security  so  admitted.  Any  securities  author- 
ized to  be  bought  and  sold  on  the  Exchange,  which  have  not 
been  subjected  to  such  scrutiny,  are  said  to  be  in  the  unlisted 


THE  HUGHES  COMMISSION  KEPORT  391 

department,  and  traders  who  deal  in  them  do  so  at  their  own  risk. 
We  have  given  consideration  to  the  subject  of  verifying  the 
statements  of  fact  contained  in  the  papers  filed  with  the  appli- 
cations for  listing,  but  we  do  not  recommend  that  either  the 
State  or  the  Exchange  take  such  responsibility.  Any  attempt  to 
do  so  would  undoubtedly  give  the  securities  a  standing  in  the 
eyes  of  the  public  which  would  not  in  all  cases  be  justified.  In 
our  judgment,  the  Exchange  should,  however,  adopt  methods  to 
compel  the  filing  of  frequent  statements  of  the  financial  condi- 
tion of  the  companies  whose  securities  are  listed,  including  bal- 
ance sheets,  income  and  expense  accounts,  etc.,  and  should  notify 
the  public  that  these  are  open  to  examination  under  proper  rules 
and  regulations.  The  Exchange  should  also  require  that  there 
be  filed  with  future  applications  for  listing  a  statement  of  what 
the  capital  stock  of  the  company  has  been  issued  for,  showing 
how  much  has  been  issued  for  cash,  how  much  for  property,  with 
a  description  of  the  property,  etc.,  and  also  showing  what  com- 
mission, if  any,  has  been  paid  to  the  promoters  or  vendors.  Fur- 
thermore, means  should  be  adopted  for  holding  those  making 
the  statements  responsible  for  the  truth  thereof.  The  unlisted 
department,  except  for  temporary  issues,  should  be  abolished. 

[The  unlisted  department  was,  in  accordance  with  the 
recommendation  of  the  Hughes  Commission,  abolished  on 
April  21,  1910.] 

FICTITIOUS    TRADES 

Complaint  is  made  that  orders  given  by  customers  are  some- 
times not  actually  executed,  although  so  reported  by  the  broker. 
We  recommend  the  passage  of  a  statute  providing  that,  in  case 
it  is  pleaded  in  any  suit  by  or  against  a  broker  that  the  purchase 
or  sale  was  fictitious,  or  was  not  an  actual  bona-fide  purchase  or 
sale  by  the  broker  as  agent  for  the  customer,  the  court  or  jury 
shall  make  a  special  finding  upon  that  fact.  In  case  it  is  found 
that  the  purchase  or  sale  was  not  actual  and  bona-fide  the  cus- 
tomer shall  recover  three  times  the  amount  of  the  loss  which  he 
sustained  thereby ;  and  copies  of  the  finding  shall  be  sent  to  the 
district  attorney  of  the  county  and  to  the  Exchange,  if  the  broker 
be  a  member. 

UNIT   OF   TRADING 

The  Exchange  should  insist  that  all  trading  be  done  on  the 

27 


392  APPENDIX 

basis  of  a  reasonably  small  unit  (say  100  shares  of  stock  or  $1,- 
000  of  bonds),  and  should  not  permit  the  offers  of  such  lots, 
or  bids  for  such  lots,  to  be  ignored  by  traders  offering  or  bidding 
for  larger  amounts.  The  practice  now  permitted  of  allowing 
bids  and  offers  for  large  amounts,  all  or  none,  assists  the  manip- 
ulation of  prices.  Thus  a  customer  may  send  an  order  to  sell 
100  shares  of  a  particular  stock  at  par,  and  a  broker  may  offer 
to  buy  1,000  shares,  all  or  none,  at  101,  and  yet  no  transaction 
take  place.  The  bidder  in  such  a  case  should  be  required  to  take 
all  the  shares  offered  at  the  lower  price  before  bidding  for  a 
larger  lot  at  a  higher  price.  This  would  tend  to  prevent  matched 
orders. 

[This  recommendation  was  adopted  by  the  Exchange 
on  March  30,  1910.  The  new  rules  are: 

"Quotations 

"1.  That  the  recognized  quotation  on  stocks  shall  be 
public  bids  and  offers  on  lots  of  100  shares. 

"Any  Part 

"2.  All  bids  and  offers  on  larger  lots  shall  be  consid- 
ered to  be  for  any  part  thereof  in  lots  of  100  shares  or  of 
multiples  thereof,  whether  so  stated  in  the  bid  or  offer 
or  not. 

"Bid  Above  Offering  Price 

"3.  If  a  bid  is  made  for  a  larger  lot  of  stock  above  the 
price  at  which  smaller  lots  are  offered,  or  if  a  transaction 
is  made  in  a  larger  lot  above  the  price  at  which  smaller 
lots  are  offered,  such  bidder  or  buyer  shall  be  compelled 
to  buy  any  or  all  of  the  smaller  lots  which  were  publicly 
offered  at  the  time,  at  the  lower  price,  up  to  the  amount 
of  the  bid  for  the  larger  lot.  If  the  bid  for  the  larger 
lot  is  accepted,  and  the  buyer  is  unwilling  to  buy  more, 
the  seller  must  give  up  to  the  members  who  were  pub- 
licly offering  to  sell  at  the  lower  price,  such  amounts  as 


THE  HUGHES  COMMISSION  REPORT  393 

they  were  publicly  offering  to  sell  at  the  lower  price,  if 
such  claim  is  made  immediately. 

"Offer  Below  Bidding  Price 

"4.  If  an  offer  is  made  to  sell  a  larger  lot  of  stock 
below  the  price  which  is  bid  for  smaller  lots,  or  if  a 
transaction  is  made  in  a  larger  lot  below  the  price  which 
is  bid  for  smaller  lots,  such  member  offering  to  sell,  or 
the  seller,  shall  be  compelled  to  sell  any  or  all  of  the 
smaller  lots  which  were  publicly  bid  for  at  the  time,  at 
the  higher  price,  up  to  the  amount  of  the  offer  of  the 
larger  lot.  If  the  offer  of  the  larger  lot  is  accepted,  and 
the  seller  is  unwilling  to  sell  more,  the  buyer  must  give 
up  to  the  members  who  were  publicly  bidding  the  higher 
price,  such  amounts  as  they  were  publicly  bidding  for,  at 
the  higher  price,  if  such  claim  is  made  immediately. 

"Claims  for  Sales  at  the   Offering  Price,  or  at  Bidding 

Price 

"5.  A  member  may  sell  on  offer  the  largest  amount 
bid  for  without  regard  to  priority  of  bids.  Should  the 
offer  be  of  an  amount  larger  than  the  largest  bid,  the 
balance  shaH  go  to  the  next  largest  bidder  in  sequence ; 
bids  for  equal  amounts  being  on  a  par. 

"A  member  may  buy  on  bids  under  the  same  rule. 

"Silent  Bids  and  Offers  Not  Recognized 

' '  6.  Attention  is  directed  to  the  resolution  of  the  Gov- 
erning Committee  adopted  October  26,  1892,  which  reads 
as  follows: 

"  'When  a  purchase  or  sale  is  claimed  by  a  party  who 
states  that  he  had  on  the  floor  a  prior  or  better  bid  or 
offer  such  claim  shall  not  be  sustained  if  the  bid  or  offer 
was  not  made  with  the  publicity  and  frequency  necessary 


304  APPENDIX 

to  make  the  existence   of  such  bid  or  offer   generally 
known  at  the  time  of  the  transaction.' 

"Disputes 

"1.  Disputes  arising  from  a  question  as  to  priority  of 
bid  or  offer,  if  not  settled  by  agreement  between  the 
members  interested,  shall  be  settled  by  vote  of  the  mem- 
bers knowing  of  the  transaction  in  question. 

"Disputes  as  to  the  application  of  the  rules  relating  to 
the  transaction  in  question,  if  not  settled  by  agreement 
between  the  members  interested,  shall  be  settled  by  any 
member  of  the  Committee  of  Arrangements. 

"Active  Openings 

"8.  The  above  rules  shall  not  apply  to  lots  of  less  than 
100  shares,  nor  to  active  openings  when  bids  and  offers 
are  simultaneous."] 

STOCK    CLEARING-HOUSE 

We  have  also  considered  the  subject  of  the  Stock  Exchange 
Clearing-House.  While  it  is  undoubtedly  true  that  the  clearing 
of  stocks  facilitates  transactions  which  may  be  deemed  purely 
manipulative,  or  virtually  gambling  transactions,  nevertheless  we 
are  of  the  opinion  that  the  Exchange  could  not  do  its  necessary 
and  legitimate  business  but  for  the  existence  of  the  clearing 
system,  and,  therefore,  that  it  is  not  wise  to  abolish  it. 

The  transactions  in  stocks  which  are  cleared  are  transcribed 
each  day  on  what  are  called  "clearing  sheets."  and  these  sheets 
are  passed  into  the  Clearing-House  and  there  filed  for  one  week 
only.  In  view  of  the  value  of  these  sheets  as  proving  the  transac- 
tions and  the  prices,  they  should  be  preserved  by  the  Exchange 
for  at  least  six  years,  and  should  be  at  the  disposal  of  the  courts, 
in  case  of  any  dispute. 

SPECIALISTS 

We  have  received  complaints  that  specialists  on  the  floor  of 
the  Exchange,  dealing  in  inactive  securities,  sometimes  buy  or 
sell  for  their  own  account  while  acting  as  brokers.  Such  acts 


THE  HUGHES  COMMISSION  REPORT  395 

without  the  principal's  consent  are  illegal.     In  every  such  case 
recourse  may  be  had  to  the  courts. 

Notwithstanding  that  the  system  of  dealing  in  specialties  is 
subject  to  abuses,  we  are  not  convinced  that  the  English  method 
of  distinguishing  between  brokers  and  jobbers  serves  any  better 
purpose  than  our  own  practice,  while  its  introduction  here  would 
complicate  business.  It  should  also  be  noted  that  the  practice  of 
specialists  in  buying  and  selling  for  their  own  account  often 
serves  to  create  a  market  where  otherwise  one  would  not  exist. 

[The  Exchange  in  accordance  with  this  recommenda- 
tion adopted  the  following  rule  on  April  4,  1910:  "Re- 
solved, That  any  member  of  the  Exchange  who,  while 
acting  as  a  broker,  either  as  a  'Specialist'  or  otherwise, 
shall  buy  or  sell  directly  or  indirectly  for  his  own  ac- 
count, for  account  of  a  partner,  or  for  any  account  in 
which  he  has  an  interest,  the  securities,  the  order  for  the 
purchase  or  sale  of  which  has  been  accepted  by  him  for 
execution,  shall  be  deemed  guilty  of  conduct  or  proceed- 
ing inconsistent  with  just  and  equitable  principles  of 
trade,  and  shall  be  subject  to  the  penalties  provided  in 
Article  XVII,  Section  6,  of  the  Constitution. 

"The  foregoing  rule  shall  not  apply  to  the  act  of  a 
member  who,  by  reason  of  his  neglect  to  execute  an  order, 
is  compelled  to  take  or  to  supply  on  his  own  account  the 
securities  named  in  the  order;  in  such  case  the  member  is 
not  acting  as  a  broker  and  shall  not  charge  a  commission. 

"A  member,  acting  as  a  broker,  is  permitted  to  report 
to  his  principal  a  transaction  as  made  with  himself,  only 
when  he  has  orders  both  to  buy  and  to  sell,  and  not  to 
give  up,  and  then  he  must  add  to  his  name  on  the  report, 
'on  order',  or  words  to  that  effect."] 

BRANCH    OFFICES 

Complaint  has  been  made  of  branch  offices  in  the  city  of  New 
York,  often  luxuriously  furnished  and  sometimes  equipped  with 
lunch  rooms,  cards,  and  liquor.  The  tendency  of  many  of  them 


396  APPENDIX 

is  to  increase  the  lure  of  the  ticker  by  the  temptation  of  creature 
comforts,  appealing  thus  to  many  who  would  not  otherwise  specu- 
late. The  governors  of  the  Exchange  inform  us  that  they  realize 
that  some  of  these  offices  have  brought  discredit  on  the  Exchange, 
and  that  on  certain  occasions  they  have  used  their  powers  to 
suppress  objectionable  features.  It  seems  to  us  that  legitimate 
investors  and  speculators  might,  without  much  hardship,  be  com- 
pelled to  do  business  at  the  main  offices,  and  that  a  hard-and-fast 
rule  against  all  branch  offices  in  the  city  of  New  York  might 
well  be  adopted  by  the  Exchange.  In  any  event,  we  are  con- 
vinced that  a  serious  and  effective  regulation  of  these  branch 
offices  is  desirable. 

[The  rules  of  the  Exchange  covering  this  matter  pro- 
vide that  every  member  must  register  with  the  secretary 
an  address,  and  if  he  forms  a  partnership  he  shall  register 
the  same;  that  no  person  shall  be  eligible  to  partnership 
in  more  than  one  registered  firm  at  the  same  time;  that 
no  member  shall  form  a  partnership  with  a  suspended  or 
expelled  member;  that  members  may,  by  the  consent  and 
approval  of  the  Committee  on  Commissions,  establish 
branch  offices,  which  must  be  either  in  charge  of  a  partner 
or  a  manager  or  clerk  acceptable  to  the  Governing  Com- 
mittee, and  that  these  branch  offices  shall  be  registered; 
that  the  managing  clerk  and  other  employes  must  be  paid 
fixed  salaries,  not  varying  with  the  business,  and  that  no 
agents  for  the  solicitation  of  business  shall  be  employed 
on  other  than  these  terms ;  that  when  it  shall  appear  that 
a  member  has  formed  a  partnership  or  established  a 
branch  office,  whereby  the  interest  or  good  repute  of  the 
Exchange  may  suffer,  the  Governing  Committee  may  re- 
quire the  dissolution  of  such  partnership,  or  the  discon- 
tinuance of  such  branch  office.] 

INCORPORATION    OF    EXCHANGE 

We  have  been  strongly  urged  to  recommend  that  the  Exchange 
be  incorporated,  in  order  to  bring  it  more  completely  under  the 


THE  HUGHES  COMMISSION  REPORT  397 

authority  and  supervision  of  the  State  and  the  process  of  the 
courts.  Under  existing  conditions,  being  a  voluntary  organiza- 
tion, it  has  almost  unlimited  power  over  the  conduct  of  its  mem- 
bers, and  it  can  subject  them  to  instant  discipline  for  wrong- 
doing, which  it  could  not  exercise  in  a  summary  manner  if  it 
were  an  incorporated  body.  We  think  that  such  power  residing 
in  a  properly  chosen  committee  is  distinctly  advantageous.  The 
submission  of  such  questions  to  the  courts  would  involve  delays 
and  technical  obstacles  which  would  impair  discipline  without 
securing  any  greater  measure  of  substantial  justice.  While  this 
committee  is  not  entirely  in  accord  on  this  point,  no  member  is 
yet  prepared  to  advocate  the  incorporation  of  the  Exchange  and 
a  majority  of  us  advise  against  it,  upon  the  ground  that  the  ad- 
vantages to  be  gained  by  incorporation  may  be  accomplished  by 
rules  of  the  Exchange  and  by  statutes  aimed  directly  at  the  evils 
which  need  correction. 

The  Stock  Exchange  in  the  past,  although  frequently  punishing 
infractions  of  its  rules  with  great  severity,  has,  in  our  opinion, 
at  times  failed  to  take  proper  measures  to  prevent  wrongdoing. 
This  has  been  probably  due  not  only  to  a  conservative  unwill- 
ingness to  interfere  in  the  business  of  others,  but  also  to  a  spirit 
of  comradeship  which  is  very  marked  among  brokers,  and  fre- 
quently leads  them  to  overlook  misconduct  on  the  part  of  fellow- 
members,  although  at  the  same  time  it  is  a  matter  of  cynical 
gossip  and  comment  in  the  street.  The  public  has  a  right  to 
expect  something  more  than  this  from  the  Exchange  and  its 
members.  This  committee,  in  refraining  from  advising  the  in- 
corporation of  the  Exchange,  does  so  in  the  expectation  that 
the  Exchange  will  in  the  future  take  full  advantage  of  the  powers 
conferred  upon  it  by  its  voluntary  organization,  and  will  be  active 
in  preventing  wrongdoing  such  as  has  occurred  in  the  past.  •  Then 
we  believe  that  there  will  be  no  serious  criticism  of  the  fact 
that  it  is  not  incorporated.  If,  however,  wrongdoing  recurs,  and 
it  should  appear  to  the  public  at  large  that  the  Exchange  has 
been  derelict  in  exerting  its  powers  and  authority  to  prevent  it, 
we  believe  that  the  public  will  insist  upon  the  incorporation  of 
the  Exchange  and  its  subjection  to  State  authority  and  super- 
vision. 

[The  action  of  a  majority  of  the  Hughes  Commission 
in  refusing  to  advocate  the  incorporation  of  the  Stock 


398  APPENDIX 

Exchange  is  in  contrast  to  the  action  of  the  Royal  Com- 
mission of  1877,  a  majority  of  which  recommended  that 
1^he  London  Exchange  should  voluntarily  apply  for  a 
Royal  Charter,  or  Act  of  Incorporation.  The  action  of 
the  Royal  Commission,  however,  was  based  upon  criti- 
cism of  a  method  of  business  of  the  London  Exchange, 
such  as  could  not  exist  under  the  regulations  of  the  New 
York  Exchange.  It  appears  that  the  chief  reason  for  the 
recommendation  of  the  Royal  Commission  was  that  the 
membership  of  the  London  Exchange  and  its  Supervising 
Committee  was  continually  changing,  being  reflected 
every  year  and  the  committee  in  charge  being  subject  to 
frequent  rotation  in  office.  The  New  York  Stock  Ex- 
change system  is  entirely  different,  as  the  membership  is 
like  that  of  a  club.  As  long  as  a  member  desires  to 
remain  a  member,  as  long  as  he  keeps  in  good  standing 
and  pays  his  dues,  he  continues  in  the  membership  with- 
out the  necessity  of  annual  reelection.  Moreover,  the 
forty  members  of  the  Governing  Committee  of  the  New 
York  Exchange  are  divided  into  four  classes,  each  elected 
annually,  so  that  every  member  of  the  committee  holds 
office  for  four  years,  and  the  Exchange  has  a  habit  of  re- 
electing,  term  after  term,  many  of  the  Governors.  As 
long  as  the  Exchange  performs  well  its  public  duty  of 
regulating  the  stock-market,  it  is  far  better  that  it  should 
be  left  unmolested  by  governmental  interference.] 

WALL  STREET   AS   A  FACTOR 

There  Is  a  tendency  on  the  part  of  the  public  to  consider  Wall 
Street  and  the  New  York  Stock  Exchange  as  one  and  the  same 
thing.  This  is  an  error  arising  from  their  location.  We  have 
taken  pains  to  ascertain  what  proportion  of  the  business  trans- 
acted on  the  Exchange  is  furnished  by  New  York  city.  The 
only  reliable  sources  of  information  are  the  books  of  the  com- 
mission houses.  An  investigation  was  made  of  the  transactions 
on  the  Exchange  for  a  given  day,  when  the  sales  were  1,500,000 


THE  HUGHES  COMMISSION  REPORT  399 

shares.  The  returns  showed  that  on  that  day  52  per  cent,  of 
the  total  transactions  on  the  Exchange  apparently  originated  in 
New  York  city,  and  48  per  cent,  in  other  localities. 

THE     CONSOLIDATED     STOCK     EXCHANGE 

The  Consolidated  Exchange  was  organized  as  a  mining  stock 
exchange  in  1875,  altering  its  name  and  business  in  1886.  Al- 
though of  far  less  importance  than  the  Stock  Exchange,  it  is 
nevertheless  a  secondary  market  of  no  mean  proportions ;  by  far 
the  greater  part  of  the  trading  is  in  securities  listed  upon  the 
main  exchange,  and  the  prices  are  based  upon  the  quotations 
made  there.  The  sales  average  about  45,000,000  shares  per 
annum.  The  fact  that  its  members  make  a  specialty  of  "broken 
lots,"  i.  e.,  transactions  in  shares  less  than  the  100  unit,  is  used 
as  a  ground  for  the  claim  that  it  is  a  serviceable  institution  for 
investors  of  relatively  small  means.  But  it  is  obvious  that  its 
utility  as  a  provider  of  capital  for  enterprises  is  exceedingly 
limited ;  and  that  it  affords  facilities  for  the  most  injurious  form 
of  speculation — that  which  attracts  persons  of  small  means. 

It  also  permits  dealing  in  shares  not  listed  in  the  main  ex- 
change, and  in  certain  mining  shares,  generally  excluded  from 
the  other.  In  these  cases  it  prescribes  a  form  of  listing  require- 
ments, but  the  original  listing  of  securities  is  very  rarely  availed 
of.  The  rules  also  provide  for  dealing  in  grain,  petroleum,  and 
other  products.  Wheat  is,  however,  at  present  the  only  com- 
modity actively  dealt  in,  and  this  is  due  solely  to  the  permission 
to  trade  in  smaller  lots  than  the  Produce  Exchange  unit  of  5,000 
bushels. 

There  are  1,225  members,  about  450  active,  and  memberships 
have  sold  in  recent  years  at  from  $650  to  $2,000.  In  general  the 
methods  of  conducting  business  are  similar  to  those  of  the  larger 
exchange,  and  subject  to  the  same  abuses. 

Very  strained  relations  have  existed  between  the  two  security 
exchanges  since  the  lesser  one  undertook  in  1886  to  deal  in  stocks. 
The  tension  has  been  increased  by  the  methods  by  which  the 
Consolidated  obtains  the  quotations  of  the  other,  through  the 
use  of  the  "tickers"  conveying  them.  It  is  probable  that  without 
the  use  of  these  instruments  the  business  of  the  Consolidated 
Exchange  would  be  paralyzed;  yet  the  right  to  use  them  rests 
solely  upon  a  technical  point  in  a  judicial  decision  which  enjoins 
their  removal. 


400  APPENDIX 

[The  rules  adopted  May  19,  1909,  by  the  New  York 
Stock  Exchange  in  relation  to  the  Consolidated  Stock 
Exchange  are  as  follows:  "Resolved,  That  any  connec- 
tion, direct  or  indirect,  by  means  of  public  or  private  tele- 
phone, telegraph  wire  or  any  electrical  or  other  con- 
trivance or  device  or  pneumatic  tube  or  other  apparatus 
or  device  whatsoever,  or  any  communication  by  means  of 
messenger,  or  clerks,  or  in  any  other  manner,  directly  or 
indirectly,  between  the  New  York  Stock  Exchange  Build- 
ing, or  any  part  thereof,  or  any  office  of  any  member  of 
said  New  York  Stock  Exchange,  or  any  part  thereof,  or 
any  room,  place,  hallway  or  space  occupied  or  controlled 
by  said  Consolidated  Stock  Exchange,  or  any  office  of  any 
member  of  said  Consolidated  Stock  Exchange,  who  is 
engaged  in  business  upon  said  Consolidated  Stock 
Exchange,  or  any  transmission,  direct  or  indirect,  of  in- 
formation from  said  New  York  Stock  Exchange  Building, 
or  from  the  office  of  any  member  of  said  New  York  Stock 
Exchange,  to  the  said  Consolidated  Stock  Exchange,  or  to 
the  office  of  any  member  of  the  said  Consolidated  Stock 
Exchange  who  is  engaged  in  business  upon  said  Consol- 
idated Stock  Exchange,  through  any  means,  apparatus, 
device  or  contrivance  as  above  mentioned,  is  detrimental 
to  the  interest  and  welfare  of  this  Exchange,  and  is 
hereby  prohibited. 

"Resolved,  That  any  member  of  this  Exchange  who 
transacts  any  business,  directly  or  indirectly,  with  or  for 
any  member  of  said  Consolidated  Stock  Exchange  who  is 
engaged  in  business  upon  said  Consolidated  Stock 
Exchange,  shall,  on  conviction  thereof,  be  deemed  to  have 
committed  an  act  or  acts  detrimental  to  the  interest  and 
welfare  of  this  Exchange."] 

not. HIM;    COMPANIES 

Connected  with  operations  on  the  Stock  Exchange  are  a  class 


THE  HUGHES  COMMISSION  REPORT  ,  401 

of  manipulations  originating  elsewhere.  The  values  of  railway 
securities,  for  example,  depend  upon  the  management  of  the 
companies  issuing  them,  the  directors  of  which  may  use  their 
power  to  increase,  diminish,  or  even  extinguish  them,  while  they 
make  gains  for  themselves  by  operations  on  the  Exchange.  They 
may  advance  the  price  of  a  stock  by  an  unexpected  dividend, 
or  depress  it  by  passing  an  expected  one.  They  may  water  a 
stock  by  issuing  new  shares,  with  no  proportionate  addition  to 
the  productive  assets  of  the  company,  or  load  it  with  indebted- 
ness, putting  an  unexpected  lien  on  the  shareholders'  property. 
Such  transactions  affect  not  only  the  fortunes  of  the  sharehold- 
ers, who  are  designedly  kept  in  ignorance  of  what  is  transpiring, 
but  also  the  value  of  investments  in  other  similar  companies  the 
securities  of  which  are  affected  sympathetically.  Railroad  wreck- 
ing was  more  common  in  the  last  half-century  than  it  is  now,  but 
we  have  some  glaring  examples  of  it  in  the  debris  of  our  street 
railways  to-day. 

The  existence  and  misuse  of  such  powers  on  the  part  of  di- 
rectors are  a  menace  to  corporate  property  and  a  temptation  to 
officials  who  are  inclined  to  speculate,  leading  them  to  manage 
the  property  so  as  to  fill  their  own  pockets  by  indirect  and 
secret  methods. 

A  holding  company  represents  the  greatest  concentration  of 
power  in  a  body  of  directors  and  the  extreme  of  helplessness 
on  the  part  of  shareholders.  A  corporation  may  be  so  organized 
that  its  bonds  and  preferred  stock  represent  the  greater  part  of 
its  capital,  while  the  common  stock  represents  the  actual  control. 
Then,  if  a  second  company  acquires  a  majority  of  the  common 
stock,  or  a  majority  of  the  shares  that  are  likely  to  be  voted 
at  elections,  it  may  control  the  former  company,  and  as  many 
other  companies  as  it  can  secure.  The  shareholders  of  the  sub- 
sidiary companies  may  be  thus  practically  deprived  of  power  to 
protect  themselves  against  injurious  measures  and  even  to  obtain 
information  of  what  the  holding  company  is  doing,  or  intends 
to  do,  with  their  property. 

As  a  first  step  toward  mitigating  this  evil  we  suggest  that 
the  shareholders  of  subsidiary  companies,  which  are  dominated 
by  holding  companies,  or  voting  trusts,  shall  have  the  same  right 
to  examine  the  books,  records,  and  accounts  of  such  holding  com- 
panies, or  voting  trusts,  that  they  have  in  respect  of  the  com- 
panies whose  shares  they  hold,  and  that  the  shareholders  of  hold- 
ing companies  have  the  same  right  as  regards  the  books,  records, 


402  APPENDIX 

and  accounts  of  the  subsidiary  companies.  The  accounts  of  com- 
panies not  merged  should  be  separately  kept  and  separately 
stated  to  their  individual  stockholders,  however  few  they  may  be. 
We  may  point  out  the  fact  that  the  powers  which  holding 
companies  now  exercise  were  never  contemplated,  or  imagined, 
when  joint  stock  corporations  were  first  legalized.  If  Parliament 
and  Legislatures  had  foreseen  their  growth  they  would  have 
erected  barriers  against  it. 

RECEIVERSHIPS 

Our  attention  has  been  directed  to  the  well-known  abuses  fre- 
quently accompanying  receiverships  of  large  corporations,  and 
more  especially  public  service  corporations,  and  the  issue  of  re- 
ceivers' certificates.  We  feel  that  the  numerous  cases  of  long- 
drawn-out  receiverships,  in  some  instances  lasting  more  than 
ten  years,  and  of  the  issue  of  large  amounts  of  receivers'  certifi- 
cates, which  take  precedence  over  even  first  mortgage  bonds, 
are  deserving  of  most  serious  consideration. 

Legislation  providing  for  a  short-time  limitation  on  receiver- 
ships, or  for  a  limitation  of  receivers'  certificates  to  a  small 
percentage  of  the  mortgage  liens  on  the  property,  could  be  ren- 
dered unnecessary,  however,  by  the  action  of  the  courts  them- 
selves along  these  lines,  so  as  to  make  impossible  in  the  future 
the  abuses  which  have  been  so  common  in  the  past. 

EFFECT   OF   THE    MONEY-MARKET   ON    SPECULATION 

It  has  been  urged  that  your  committee  consider  the  influence 
of  the  money-market  upon  security  speculation. 

As  a  result  of  conditions  to  which  the  defects  of  our  mone- 
tary and  banking  systems  chiefly  contribute,  there  is  frequently 
a  congestion  of  funds  in  New  York  city,  when  the  supply  is  in 
excess  of  business  needs  and  the  accumulated  surplus  from  the 
entire  country  generally  is  thereby  set  free  for  use  in  the  specu- 
lative market  Thus  there  almost  annually  occurs  an  inordi- 
nately low  rate  for  "call  loans,"  at  times  less  than  one  per  cent. 
During  the  prevalence  of  this  abnormally  low  rate  speculation 
Is  unduly  Incited,  and  speculative  loans  are  very  largely  expanded. 

On  the  other  hand,  occasional  extraordinary  industrial  ac- 
tivity, coupled  with  the  annually  recurring  demands  for  money 
during  the  crop-moving  season,  causes  money  stringency,  and  the 
calling  of  loans  made  to  the  stock-market ;  an  abnormally  high 


THE  HUGHES  COMMISSION  REPORT  403 

interest  rate  results,  attended  by  violent  reaction  in  speculation 
and  abrupt  fall  in  prices.  The  pressure  to  retain  funds  in  the 
speculative  field  at  these  excessively  high  interest  rates  tends 
to  a  curtailment  of  reasonable  accommodation  to  commercial 
and  manufacturing  interests,  frequently  causing  embarrassment 
and  at  times  menacing  a  crisis. 

The  economic  questions  involved  in  these  conditions  are  the 
subject  of  present  consideration  by  the  Federal  authorities  and 
the  National  Monetary  Commission.  They  could  not  be  adjusted 
or  adequately  controlled  either  through  Exchange  regulation  or 
State  legislation. 

THE   USUBY   LAW 

The  usury  law  of  this  State  prohibits  the  taking  of  more  than 
6  per  cent,  interest  for  the  loan  of  money,  but  by  an  amendment 
adopted  in  1882  an  exception  is  made  in  the  case  of  loans  of 
$5,000  or  more,  payable  on  demand  and  secured  by  collateral. 
It  is  claimed  by  some  that,  since  this  exception  enables  stock 
speculators,  in  times  of  great  stringency,  to  borrow  money  by 
paying  excessively  high  rates  of  interest,  to  the  exclusion  of 
other  borrowers,  a  repeal  of  this  provision  would  check  inordinate 
speculation.  We  direct  attention,  however,  to  the  fact  that  the 
statute  in  question  excepts  such  loans  as  are  secured  by  ware- 
house receipts,  bills  of  lading,  bills  of  exchange,  and  other  nego- 
tiable instruments.  Hence  its  operation  is  not  limited  to  Stock 
Exchange  transactions,  or  to  speculative  loans  in  general.  More- 
over the  repeal  of  the  statute  would  affect  only  the  conditions 
when  high  rates  of  interest  are  exacted,  and  not  those  of  ab- 
normally low  rates,  which  really  promote  excessive  speculation. 
Finally,  our  examination  indicates  that  prior  to  the  enactment 
of  the  statute  of  1882  such  loans  were  negotiated  at  the  maxi- 
mum (6  per  cent),  plus  a  commission,  which  made  it  equivalent 
to  the  higher  rate;  and  a  repeal  of  the  statute  would  lead  to 
the  resumption  of  this  practice.  Therefore,  as  the  repeal  would 
not  be  beneficial,  we  cannot  recommend  any  legislation  bearing 
upon  the  interest  laws  of  the  State,  unless  it  be  the  repeal  of 
the  usury  law  altogether,  as  we  believe  that  money  will  inevitably 
seek  the  point  of  highest  return  for  its  use.  In  nine  States  of 
the  Union  there  are  at  present  no  usury  laws. 

[The  report  of  the  Commission  on  this  subject  is  in 


404  APPENDIX 

accordance  with  the  best  financial  authorities.  It  has 
often  been  proposed  that  it  would  be  to  the  advantage  of 
both  the  money-  and  stock-markets,  as  well  as  of  the 
mercantile  community  at  large,  if  some  method  were 
adopted  by  which  more  staple  rates  of  interest  could  be 
insured.  The  extreme  changes  in  rates  of  interest  which 
sometimes  occur  in  Wall  Street  are  demoralizing  and  dis- 
creditable. The  establishment  of  a  great  central  reserve 
association,  such  as  is  proposed  by  the  Monetary  Commis- 
sion, would  undoubtedly  do  away  with  this  evil.  It  has 
also  been  frequently  proposed  that  the  New  York  Clear- 
ing-House  establish  a  committee  empowered  to  fix  an 
equitable  rate  of  interest  every  day.  This  would  prob- 
ably work  well,  though  it  might  result  in  annoying  crit- 
icism of  the  Clearing-House  as  being  a  "money  trust."] 

THE    CUBB    MABKET 

There  is  an  unorganized  stock-market  held  in  the  open  air 
during  exchange  hours.  It  occupies  a  section  of  Broad  Street 
An  enclosure  in  the  center  of  the  roadway  is  made  by  means  of 
a  rope,  within  which  the  traders  are  supposed  to  confine  them- 
selves, leaving  space  on  either  side  for  the  passage  of  street 
traffic ;  but  during  days  of  active  trading  the  crowd  often  extends 
from  curb  to  curb. 

There  are  about  200  subscribers,  of  whom  probably  150  appear 
on  the  curb  each  day,  and  the  machinery  of  the  operations  re- 
quires the  presence  of  as  many  messenger  boys  and  clerks.  Such 
obstruction  of  the  public  thoroughfare  is  obviously  illegal,  but 
no  attempt  has  been  made  by  the  city  authorities  to  disperse  the 
crowd  that  habitually  assembles  there. 

This  open-air  market,  we  understand,  is  dependent  for  the 
great  bulk  of  its  business  upon  members  of  the  Stock  Exchange, 
approximately  85  per  cent,  of  the  orders  executed  on  the  curb 
coming  from  Stock  Exchange  houses.  The  Exchange  itself  keeps 
the  curb  market  in  the  street,  since  it  forbids  its  own  members 
engaging  in  any  transaction  in  any  other  security  exchange  in 
New  York.  If  the  curb  were  put  under  a  roof  and  organized, 
this  trading  could  not  be  maintained. 


THE  HUGHES  COMMISSION  REPORT  405 

ITS    UTILITY 

The  curb  market  has  existed  for  upwards  of  thirty  years,  but 
only  since  the  great  development  of  trading  in  securities  began, 
about  the  year  1897,  has  it  become  really  important.  It  affords 
a  public  market  place  where  all  persons  can  buy  and  sell  securi- 
ties which  are  not  listed  on  any  organized  exchange.  Such 
rules  and  regulations  as  exist  are  agreed  to  by  common  consent, 
and  the  expenses  of  maintenance  are  paid  by  voluntary  sub- 
scription. An  agency  has  been  established  by  common  consent 
through  which  the  rules  and  regulations  are  prescribed. 

This  agency  consists  solely  of  an  individual  who,  through  his 
long  association  with  the  curb,  is  tacitly  accepted  as  arbiter. 
From  this  source  we  learn  that  sales  recorded  during  the  year 
1908  were  roughly  as  follows : 

Bonds   $66,000,000 

Stocks,  industrials,  shares 4,770,000 

Stocks,  mining,  shares 41,825,000 

Official  quotations  are  issued  daily  by  the  agency  and  appear 
in  the  public  press.  Corporations  desiring  their  securities  to 
be  thus  quoted  are  required  to  afford  the  agency  certain  informa- 
tion, which  is,  however,  superficial  and  incomplete.  There  is 
nothing  on  the  curb  which  corresponds  to  the  listing  process 
of  the  Stock  Exchange.  The  latter,  while  not  guaranteeing  the 
soundness  of  the  securities,  gives  a  prima  facie  character  to 
those  on  the  list,  since  the  stock  list  committee  takes  some  pains 
to  learn  the  truth.  The  decisions  of  the  agent  of  the  curb  are 
based  on  insufficient  data,  and  since  much  of  the  work  relates 
to  mining  schemes  in  distant  States  and  Territories,  and  foreign 
countries,  the  mere  fact  that  a  security  is  quoted  on  the  curb 
should  create  no  presumption  in  its  favor ;  quotations  frequently 
represent  "wash  sales,"  thus  facilitating  swindling  enterprises. 

EVILS   OF   UNORGANIZED    STATUS 

Bitter  complaints  have  reached  us  of  frauds  perpetrated  upon 
confiding  persons,  who  have  been  induced  to  purchase  mining 
shares  because  they  are  quoted  on  the  curb ;  these  are  frequently 
advertised  in  newspapers  and  circulars  sent  through  the  mails 
as  so  quoted.  Some  of  these  swindles  have  been  traced  to  their 
fountain-heads  by  the  Post  Office  Department,  to  which  com- 


406  APPENDIX 

plaint  has  been  made ;  but  usually  the  swindler,  when  cornered, 
has  settled  privately  with  the  individual  complainant,  and  then 
the  prosecution  has  failed  for  want  of  testimony.  Meanwhile 
the  same  operations  may  continue  in  many  other  places,  till  the 
swindle  becomes  too  notorious  to  be  profitable. 

Notwithstanding  the  lack  of  proper  supervision  and  control 
over  the  admission  of  securities  to  the  privilege  of  quotation, 
some  of  them  are  meritorious,  and  in  this  particular  the  curb 
performs  a  useful  function.  The  existence  of  the  cited  abuses 
does  not,  in  our  judgment,  demand  the  abolition  of  the  curb 
market.  Regulation  is,  however,  imperative.  To  require  an 
elaborate  organization  similar  to  that  existing  in  the  Exchanges 
would  result  in  the  formation  of  another  curb  free  from  such 
restraint. 

As  has  been  stated,  about  85  per  cent,  of  the  business  of  the 
curb  comes  through  the  offices  of  members  of  the  New  York  Stock 
Exchange,  but  a  provision  of  the  constitution  of  that  Exchange 
prohibits  its  members  from  becoming  members  of,  or  dealing, 
on,  any  other  organized  Stock  Exchange  in  New  York.  Accord- 
ingly, operators  on  the  curb  market  have  not  attempted  to  form 
an  organization.  The  attitude  of  the  Stock  Exchange  is  there- 
fore largely  responsible  for  the  existence  of  such  abuses  as  result 
from  the  want  of  organization  of  the  curb  market.  The  brokers 
dealing  on  the  latter  do  not  wish  to  lose  their  best  customers, 
and  hence  they  submit  to  these  irregularities  and  inconveniences. 

Some  of  the  members  of  the  Exchange  dealing  on  the  curb 
have  apparently  been  satisfied  with  the  prevailing  conditions, 
and  in  their  ovvn  selfish  interests  have  maintained  an  attitude 
of  indifference  toward  abuses.  We  are  informed  that  some  of 
the  most  flagrant  cases  of  discreditable  enterprises  finding  deal- 
ings on  the  curb  were  promoted  by  members  of  the  New  York 
Stock  Exchange. 

REFORMATION    OF    THE    CURB 

The  present  apparent  attitude  of  the  Exchange  toward  the 
curb  seems  to  us  clearly  inconsistent  with  its  moral  obligations 
to  the  community  at  large.  Its  governors  have  frequently  avowed 
before  this  committee  a  purpose  to  cooperate  to  the  greatest 
extent  for  the  remedy  of  any  evils  found  to  exist  in  stock  specula- 
tion. The  curb  market  as  at  present  constituted  affords  ample 
opportunity  for  the  exercise  of  such  helpfulness. 


THE  HUGHES  COMMISSION  REPORT  407 

The  Stock  Exchange  should  compel  the  formulation  and  en- 
forcement of  such  rules  as  may  seem  proper  for  the  regulation 
of  business  on  the  curb,  the  conduct  of  those  dealing  thereon, 
and,  particularly,  for  the  admission  of  securities  to  quotation. 

If  the  curb  brokers  were  notified  that  failure  to  comply  with 
such  requirements  would  be  followed  by  an  application  of  the 
rule  of  non-intercourse,  there  is  little  doubt  that  the  orders  of 
the  Exchange  would  be  obeyed.  The  existing  connection  of  the 
Exchange  gfves  it  ample  power  to  accomplish  this,  and  we  do 
not  suggest  anything  implying  a  more  intimate  connection. 

Under  such  regulation,  the  curb  market  might  be  decently 
housed  to  the  relief  of  its  members  and  the  general  public. 

THE   ABUSE   OF   ADVERTISING 

A  large  part  of  the  discredit  in  the  public  mind  attaching  to 
"Wall  Street"  is  due  to  frauds  perpetrated  on  the  small  investor 
throughout  the  country  in  the  sale  of  worthless  securities  by 
means  of  alluring  circulars  and  advertisements  in  the  newspapers. 
To  the  success  of  such  swindling  enterprises  a  portion  of  the 
press  contributes. 

Papers  which  honestly  try  to  distinguish  between  swindling 
advertisements  and  others,  may  not  in  every  instance  succeed  in 
doing  so ;  but  readiness  to  accept  advertisements  which  are  obvi- 
ously traps  for  the  unwary  is  evidence  of  a  moral  delinquency 
which  should  draw  out  the  severest  public  condemnation. 

So  far  as  the  press  in  large  cities  is  concerned  the  correction 
of  the  evil  lies,  in  some  measure,  in  the  hands  of  the  reputable 
bankers  and  brokers,  who,  by  refusing  their  advertising  patronage 
to  newspapers  notoriously  guilty  in  this  respect,  could  compel 
them  to  mend  their  ways,  and  at  the  same  time  prevent  fraudu- 
lent schemes  from  deriving  an  appearance  of  merit  by  associa- 
tion with  reputable  names. 

Another  serious  evil  is  committed  by  men  who  give  standing 
to  promotions  by  serving  as  directors  without  full  knowledge  of 
the  affairs  of  the  companies,  and  by  allowing  their  names  to 
appear  in  prospectuses  without  knowing  the  accuracy  and  good 
faith  of  the  statements  contained  therein.  Investors  naturally 
and  properly  pay  great  regard  to  the  element  of  personal  char- 
acter, both  in  the  offering  of  securities  and  in  the  management 
of  corporations,  and  can  therefore  be  deceived  by  the  names  used 
in  unsound  promotions. 
28 


408  APPENDIX 

BRITISH  SYSTEM  CONSIDERED 

We  have  given  much  attention  to  proposals  for  compelling 
registration,  by  a  bureau  of  the  State  government,  of  all  cor- 
porations whose  securities  are  offered  for  public  sale  in  this  State, 
accompanied  by  information  regarding  their  financial  responsi- 
bility and  prospects,  and  prohibiting  the  public  advertisement 
or  sale  of  such  securities  without  a  certificate  from  the  bureau 
that  the  issuing  company  has  been  so  registered.  The  object 
of  such  registration  would  be  to  identify  the  promoters,  so  that 
they  might  be  readily  prosecuted  in  case  of  fraud.  Such  a  sys- 
tem exists  in  Great  Britain.  The  British  "Companies  Act"  pro- 
vides for  such  registration,  and  the  "Directors'  Liability  Act" 
regulates  the  other  evil  referred  to  above.  Some  members  of 
your  committee  are  of  the  opinion  that  these  laws  should  be 
adopted  in  this  country,  so  far  as  they  will  fit  conditions  here. 

This  would  meet  with  some  difficulties,  due  in  part  to  our 
multiple  system  of  State  government.  If  the  law  were  in  force 
only  in  this  State,  the  advertisement  and  sale  of  the  securities 
in  question  would  be  unhindered  in  other  markets,  and  com- 
panies would  be  incorporated  in  other  States,  in  order  that  their 
directors  and  promoters  should  escape  liability.  The  certificate 
of  registration  might  be  accepted  by  inexperienced  persons  as 
an  approval  by  State  authority  of  the  enterprise  in  question. 
For  these  reasons  the  majority  of  your  committee  does  not  recom- 
mend the  regulation  of  such  advertising  and  sale  by  State  reg- 
istration. 

Insofar  as  the  misuse  of  the  post  office  for  the  distribution 
of  swindling  circulars  could  be  regulated  by  the  Federal  authori- 
ties, the  officials  have  been  active  in  checking  it.  They  inform  us 
that  vendors  of  worthless  securities  are  aided  materially  by  the 
opportunity  to  obtain  fictitious  price  quotations  for  them  on  the 
New  York  curb  market. 

LEGISLATION   RECOMMENDED 

For  the  regulation  of  the  advertising  evils,  including  the  vicious 
"tipster's"  cards,  we  recommend  an  amendment  to  the  Penal 
Code  to  provide  that  any  person  who  advertises,  in  the  public 
press  or  otherwise,  or  publishes,  distributes  or  mails,  any  pros- 
pectus, circular,  or  other  statement  in  regard  to  the  value  of 
any  stock,  bonds,  or  other  securities,  or  in  regard  to  the  business 
affairs,  property,  or  financial  condition  of  any  corporation,  joint 


THE  HUGHES  COMMISSION  REPORT  409 

stock  association,  copartnership  or  individual  issuing  stock,  bonds 
or  other  similar  securities,  which  contains  any  statement  of  fact 
which  is  known  to  such  person  to  be  false,  or  as  to  which  such 
person  has  no  reasonable  grounds  for  believing  it  to  be  true,  or 
any  promises  or  predictions  which  he  cannot  reasonably  justify, 
shall  be  guilty  of  a  misdemeanor ;  and,  further,  that  every  news- 
paper or  other  publication  printing  or  publishing  such  an  ad- 
vertisement, prospectus,  circular,  or  other  statement,  shall  before 
printing  or  publishing  the  same,  obtain  from  the  person  responsi- 
ble for  the  same,  and  retain,  a  written  and  signed  statement  to 
the  effect  that  such  person  accepts  responsibility  for  the  same, 
and  for  the  statements  of  fact  contained  therein,  which  statement 
shall  give  the  address,  with  street  number,  of  such  person ;  and 
that  the  publisher  of  any  such  newspaper  or  other  publication 
which  shall  fail  to  obtain  and  retain  such  statement  shall  be 
guilty  of  a  misdemeanor. 

BUCKET-SHOPS 

Bucket-shops  are  ostensibly  brokerage  offices,  where,  however, 
commodities  and  securities  are  neither  bought  nor  sold  in  pur- 
suance of  customers'  orders,  the  transactions  being  closed  by  the 
payment  of  gains  or  losses,  as  determined  by  price  quotations. 
In  other  words,  they  are  merely  places  for  the  registration  of 
bets  or  wagers ;  their  machinery  is  generally  controlled  by  the 
keepers,  who  can  delay  or  manipulate  the  quotations  at  will. 

The  law  of  this  State,  which  took  effect  September  1,  1908, 
makes  the  keeping  of  a  bucket-shop  a  felony,  punishable  by  fine 
and  imprisonment,  and  in  the  case  of  corporations,  on  second 
offenses  by  dissolution  or  expulsion  from  the  State.  In  the  case 
of  individuals  the  penalty  for  a  second  offense  is  the  same  as 
for  the  first.  These  penalties  are  imposed  upon  -the  theory  that 
the  practice  is  gambling;  but  in  order  to  establish  the  fact  of 
gambling  it  is  necessary,  under  the  New  York  law,  to  show  that 
both  parties  to  the  trade  intended  that  it  should  be  settled  by 
the  payment  of  differences,  and  not  by  delivery  of  property. 
Under  the  law  of  Massachusetts  it  is  necessary  to  show  only 
that  the  bucket-shop  keeper  so  intended.  The  Massachusetts 
law  provides  heavier  penalties  for  the  second  offense  than  for 
the  first,  and  makes  it  a  second  offense  if  a  bucket-shop  is  kept 
open  after  the  first  conviction. 

[The  action  taken  by  the  New  York  Stock  Exchange 


410  APPENDIX 

May  19,  1909,  in  relation  to  bucket-shops  provides: 
"That  any  member  of  this  Exchange  who  is  interested  in, 
or  associated  in  business  with,  or  whose  office  is  con- 
nected, directly  or  indirectly,  by  public  or  private  wire 
or  other  method  of  contrivance  with,  or  who  transacts 
any  business  directly  or  indirectly,  with  or  for,  any  or- 
ganization, firm  or  individual  engaged  in  the  business  of 
dealing  in  differences  or  quotations  (commonly  called  a 
bucket-shop)  shall,  on  conviction  thereof,  be  deemed  to 
have  committed  an  act  or  acts  detrimental  to  the  interest 
and  welfare  of  this  Exchange."] 

AMENDMENT   OF  LAW   RECOMMENDED 

We  recommend  that  the  foregoing  features  of  the  Massachu- 
setts law  be  adopted  in  this  State :  also  that  section  355  of  the 
act  of  1908  be  amended  so  as  to  require  brokers  to  furnish  to 
their  customers  in  all  cases,  and  not  merely  on  demand,  the 
names  of  brokers  from  whom  shares  were  bought  and  to  whom 
they  were  sold;  and  that  the  following  section  be  added  to  the 
act: 

Witness's  privilege: 

No  person  shall  be  excused  from  attending  and  testifying,  or 
producing  any  books,  papers,  or  other  documents  before  any 
court  or  magistrate,  upon  any  trial,  investigation,  or  proceeding 
initiated  by  the  district  attorney  for  a  violation  of  any  of  the 
provisions  of  this  chapter,  upon  the  ground  or  for  the  reason 
that  the  testimony  or  evidence,  documentary  or  otherwise,  re- 
quired of  him  may  tend  to  convict  him  of  a  crime  or  to  subject 
him  to  a  penalty  or  forfeiture ;  but  no  person  shall  be  prosecuted 
or  subjected  to  any  penalty  or  forfeiture  for  or  on  account  of 
any  transaction,  matter,  or  thing  concerning  which  he  may  so 
testify  or  produce  evidence,  documentary  or  otherwise,  and  no 
testimony  so  given  or  produced  shall  be  received  against  him 
upon  any  criminal  investigation  or  proceeding. 

There  has  been  a  sensible  diminution  in  the  number  of  bucket- 
shops  in  New  York  since  the  act  of  1908  took  effect,  but  there 
Is  still  much  room  for  improvement. 

Continuous  quotations  of  prices  from  an  exchange  are  indis- 


THE  HUGHES  COMMISSION  REPORT  411 

pensable  to  a  bucket-shop,  and  when  such  quotations  are  cut 
off  this  gambling  ends ;  therefore  every  means  should  be  em- 
ployed to  cut  them  off. 

SALES   OF   QUOTATIONS 

The  quotations  of  exchanges  have  been  judicially  determined 
to  be  their  own  property,  which  may  be  sold  under  contracts 
limiting  their  use.  In  addition  to  supplying  its  own  members 
in  New  York  city  with  its  quotations,  the  Stock  Exchange  sells 
them  to  the  telegraph  companies,  under  contracts  restricting  the 
delivery  of  the  service  in  New  York  city  to  subscribers  approved 
by  a  committee  of  the  Exchange ;  the  contracts  are  terminable 
at  its  option.  This  restriction  would  imply  a  purpose  on  the 
part  of  the  Exchange  to  prevent  the  use  of  the  quotations  by 
bucket-shop  keepers.  But  the  contracts  are  manifestly  insuf- 
ficient, in  that  they  fail  to  cover  the  use  of  the  service  in  places 
other  than  New  York  city ;  if  corroboration  were  needed  it  could 
be  found  in  the  fact  that  the  quotations  are  the  basis  for  bucket- 
shop  transactions  in  other  cities.  In  such  effort  as  has  been  made 
to  control  these  quotations  the  Exchange  has  been  hampered,  to 
some  extent,  by  the  claim  that  telegraph  companies  are  common 
carriers,  and  that  as  such  they  must  render  equal  service  to  all 
persons  offering  to  pay  the  regular  charge  therefor.  This  claim 
has  been  made  in  other  States  as  well  as  in  New  York,  and  the 
telegraph  companies  have  in  the  past  invoked  it  as  an  excuse  for 
furnishing  quotations  to  people  who  were  under  suspicion,  al- 
though it  was  not  possible  to  prove  that  they  were  operating 
bucket-shops.  Recent  decisions  seem  to  hold  that  this  claim 
is  not  well-founded.  We  advise  that  a  law  be  passed  providing 
that,  so  far  as  the  transmission  of  continuous  quotations  is  con- 
cerned, telegraph  companies  shall  not  be  deemed  common  car- 
riers, or  be  compelled  against  their  volition  to  transmit  such 
quotations  to  any  person ;  also  a  law  providing  that  if  a  tele- 
graph company  has  reasonable  ground  for  believing  that  it  is 
supplying  quotations  to  a  bucket-shop,  it  be  criminally  liable 
equally  with  the  keeper  of  the  bucket-shop.  Such  laws  would 
enable  these  companies  to  refuse  to  furnish  quotations  upon 
mere  suspicion  that  parties  are  seeking  them  for  an  unlawful 
business,  and  would  compel  them  to  refuse  such  service  wherever 
there  was  reasonable  ground  for  believing  that  a  bucket-shop 
was  being  conducted. 


412  APPENDIX 

LICENSING   TICKERS 

Tickers  carrying  the  quotations  should  be  licensed  and  bear 
a  plate  whereon  should  appear  the  name  of  the  corporation,  firm, 
or  individual  furnishing  the  service  or  installing  the  ticker,  and 
a  license  number.  Telegraph  companies  buying  or  transmitting 
quotations  from  the  exchanges  should  be  required  to  publish 
semi-annually  the  names  of  all  subscribers  to  the  service  fur- 
nished, and  the  number  and  location  of  the  tickers,  in  a  news- 
paper of  general  circulation  published  in  the  city  or  town  in 
which  such  tickers  are  installed.  In  case  the  service  is  furnished 
to  a  corporation,  firm,  or  person,  in  turn  supplying  the  quotations 
to  others,  like  particulars  should  be  published.  A  record,  open 
to  public  inspection,  should  be  kept  by  the  installing  company 
showing  the  numbers  and  location  of  the  tickers.  Doubtless 
local  boards  of  trade,  civic  societies,  and  private  individuals 
would,  if  such  information  were  within  their  reach,  lend  their 
aid  to  the  authorities  in  the  enforcement  of  the  law. 

Measures  should  be  taken  also  to  control  the  direct  wire  serv- 
ice for  the  transmission  of  quotations  and  for  the  prompt  discon- 
tinuance of  such  service  in  case  of  improper  use  thereof.  In 
short,  every  possible  means  should  be  employed  to  prevent  bucket- 
shops  from  obtaining  the  continuous  quotations,  without  which 
their  depredations  could  not  be  carried  on  a  single  day. 

THE   COMMODITY   EXCHANGES 

Of  the  seven  commodity  exchanges  in  the  city  of  New  York, 
three  dealing  with  Produce,  Cotton,  and  Coffee,  are  classed  as 
of  major  importance ;  two  organized  by  dealers  in  Fruit  and 
Hay,  are  classed  as  minor ;  and  two  others,  the  Mercantile  (con- 
cerned with  dairy  and  poultry  products)  and  the  Metal  (con- 
cerned with  mining  products)  are  somewhat  difficult  of  classi- 
fication, as  will  appear  hereafter. 

THE    MAJOR    EXCHANGES 

The  business  transacted  on  the  three  major  exchanges  is  mainly 
speculative,  consisting  of  purchases  and  sales  for  future  delivery 
either  by  those  who  wish  to  eliminate  risks  or  by  those  who 
seek  to  profit  by  fluctuations  in  the  value  of  products.  "Cash" 
or  "spot"  transactions  are  insignificant  in  volume. 

The  objects,  as  set  forth  in  the  charters,  are  to  provide  places 
for  trading,  establish  equitable  trade  principles  and  usages,  ob- 


THE  HUGHES  COMMISSION  REPORT  413 

tain    and    disseminate    useful    information,    adjust    controversies, 
and  fix  by-laws  and  rules  for  these  purposes. 

Trading  in  differences  of  price  and  "wash  sales"  are  strictly 
prohibited  under  penalty  of  expulsion.  All  contracts  of  sale 
call  for  delivery,  and  unless  balanced  and  cancelled  by  equivalent 
contracts  of  purchase,  must  be  finally  settled  by  a  delivery  of 
the  merchandise  against  cash  payment  of  its  value  as  specified 
in  the  terms  of  the  contract;  but  the  actual  delivery  may  be 
waived  by  the  consent  of  both  parties.  Possession  is  for  the 
most  part  transferred  from  the  seller  to  the  purchaser  by  ware- 
house receipts  entitling  the  holder  to  the  ownership  of  the  goods 
described. 

DEALING  IN    "FUTUBES" 

The  selling  of  agricultural  products  for  future  delivery  has 
been  the  subject  of  much  controversy  in  recent  years.  A  measure 
to  prohibit  such  selling,  known  as  the  Hatch  Anti-Option  bill, 
was  debated  at  great  length  in  Congress  during  the  years  1892, 
1893,  and  1894.  Although  it  passed  both  House  and  Senate  in 
different  forms,  it  was  finally  abandoned  by  common  consent 
As  shown  hereafter,  similar  legislation  in  Germany  has  proved 
injurious;  and  when  attempted  by  our  States  it  has  either  re- 
sulted detrimentally  or  been  inoperative.  The  subject  was  ex- 
haustively considered  by  the  Industrial  Commission  of  Congress 
which  in  1901  made  an  elaborate  report  (Vol.  VI),  showing  that 
selling  for  future  delivery,  based  upon  a  forecast  of  future  con- 
ditions of  supply  and  demand,  is  an  indispensable  part  of  the 
world's  commercial  machinery,  by  which  prices  are,  as  far  as 
possible,  equalized  throughout  the  year  to  the  advantage  of  both 
producer  and  consumer.  The  subject  is  also  treated  with  clear- 
ness and  impartiality  in  the  Cyclopedia  of  American  Agriculture, 
in  an  article  on  "Speculation  and  Farm  Prices" ;  where  it  is 
shown  that  since  the  yearly  supply  of  wheat,  for  example,  ma- 
tures within  a  comparatively  short  period  of  time  somebody  must 
handle  and  store  the  great  bulk  of  it  during  the  interval  between 
production  and  consumption.  Otherwise  the  price  will  be  unduly 
depressed  at  the  end  of  one  harvest  and  correspondingly  ad- 
vanced before  the  beginning  of  another. 

Buying  for  future  delivery  causes  advances  in  prices ;  selling 
short  tends  to  restrain  inordinate  advances.  In  each  case  there 
must  be  a  buyer  and  a  seller  and  the  interaction  of  their  trad- 
ing steadies  prices.  Speculation  thus  brings  into  the  market  a 


414  APPENDIX 

distinct  class  of  people  possessing  capital  and  special  training 
who  assume  the  risks  of  holding  and  distributing  the  proceeds 
of  the  crops  from  one  season  to  another  with  the  minimum  of 
cost  to  producer  and  consumer. 

HEDGING 

A  considerable  part  of  the  business  done  by  these  exchanges 
consists  of  "hedging."  This  term  is  applied  to  the  act  of  a  miller, 
for  example,  who  is  under  contract  to  supply  a  given  quantity 
of  flour  monthly  throughout  the  year.  In  order  to  insure  him- 
self against  loss  he  makes  a  contract  with  anybody  whom  he 
considers  financially  responsible,  to  supply  him  wheat  at  times 
and  in  the  quantities  needed.  He  "hedges"  against  a  possible 
scarcity  and  consequent  rise  in  the  price  of  wheat.  If  the  miller 
were  restricted  in  his  purchases  to  persons  in  the  actual  pos- 
session of  wheat  at  the  time  of  making  the  contract  he  would 
be  exposed  to  monopoly  prices.  If  the  wheat  producer  were  lim- 
ited In  his  possibilities  of  sale  to  consumers  only,  he  would  be 
subjected  to  the  depressing  effects  of  a  glut  in  the  market  in 
June  and  September,  at  times  of  harvest. 

To  the  trader,  manufacturer,  or  exporter,  the  act  of  trans- 
ferring the  risk  of  price  fluctuations  to  other  persons  who  are 
willing  to  assume  it,  has  the  effect  of  an  insurance.  It  enables 
him  to  use  all  of  his  time  and  capital  in  the  management  of  his 
own  business  instead  of  devoting  some  part  of  them  to  contin- 
gencies arising  from  unforeseen  crop  conditions. 

ALTERNATIVE    CONTRACTS 

In  order  to  eliminate  the  risk  of  a  shortage  of  specific  grades 
of  the  merchandise  thus  traded  in,  contracts  generally  permit 
the  delivery  of  alternative  grades,  within  certain  limits,  at  dif- 
ferential prices;  and  if  the  grade  to  be  delivered  be  not  suit- 
able for  the  ultimate  needs  of  the  purchaser,  it  can  under  or- 
dinary circumstances  be  exchanged  for  the  grade  needed,  by  the 
payment  of  the  differential.  It  is  true  that  in  this  exchange 
of  grades  there  is  sometimes  a  loss  or  a  profit,  owing  to  some 
unexpected  diminution  or  excess  of  supply  of  the  particular  grade 
wanted,  due  to  the  weather  or  other  natural  causes. 

Deposits  of  cash  margins  may  be  required  mutually  by  mem- 
bers at  the  time  of  making  contracts,  and  subsequent  additional 
ones  if  market  fluctuations  justify. 


THE  HUGHES  COMMISSION  REPORT  415 

Dealings  for  outsiders  are  usually  upon  a  10  per  cent,  margin ; 
obviously  if  this  margin  were  increased  generally,  say  to  20 
per  cent.,  a  considerable  part  of  the  criticism  due  to  losses  in 
speculation,  particularly  as  to  the  Cotton  Exchange,  would  be 
eliminated. 

The  major  part  of  the  transactions  are  adjusted  by  clearing 
systems,  the  method  most  prevalent  being  "ring  settlements," 
by  which  groups  of  members  having  buying  and  selling  con- 
tracts for  identical  quantities,  offset  them  against  each  other, 
cancelling  them  upon  the  payment  of  the  differences  in  prices. 

THE    PRODUCE    EXCHANGE 

The  New  York  Produce  Exchange  was  chartered  by  the  Legis- 
lature in  1862,  under  the  style  of  the  "New  York  Commercial 
Association."  The  charter  has  been  amended  several  times ;  in 
1907  dealing  in  securities,  as  well  as  in  produce,  was  authorized. 
There  are  over  2,000  members,  but  a  large  number  are  inactive. 
Some  members  are  also  connected  with  the  Stock  and  Cotton 
Exchanges.  The  business  includes  dealing  in  all  grains,  cotton- 
seed oil,  and  a  dozen  or  more  other  products ;  wheat  is,  how- 
ever, the  chief  subject  of  trading,  and  part  thereof  consists  of 
hedging  by  and  for  millers,  exporters,  and  importers,  both  here 
and  abroad.  The  quantity  of  wheat  received  in  New  York  in  the 
five  years  1904-1908  averaged  21,000,000  bushels  annually.  No 
record  of  "cash"  sales  is  kept.  The  reported  sales  of  "futures" 
show  in  five  years  an  annual  average  of  480,000,000  bushels,  the 
year  1907  showing  610,000,000.  Although  some  of  these  sales 
were  virtually  bets  on  price  differences,  all  of  them  were  con- 
tracts enforceable  at  law. 

CLEABINQ   SYSTEM 

The  greater  part  of  the  transactions  are  settled  by  a  clearing 
system.  The  Clearing  Association  is  a  separate  organization, 
duly  incorporated,  with  a  capital  of  $25,000.  All  members  of 
the  association  must  settle  daily  by  the  clearing  system ;  other 
members  of  the  Exchange  may  do  so.  The  Clearing  Association 
assumes  responsibility  for  the  trades  of  all  its  members,  and  ac- 
cordingly controls  the  exaction  of  margins  from  members  to  each 
other,  and  may  increase  them  at  any  time  if  the  fluctuations 
require  it.  The  records  of  the  clearings  show  day  by  day  the 
status  of  each  member's  trading — how  much  he  may  be  "long" 


416  APPENDIX 

or  "short"  in  the  aggregate.  Thus  the  members  have  a  system 
of  protection  against  each  other;  the  welfare  of  all  depends  upon 
keeping  the  commitments  of  each  within  safe  limits.  The  of- 
ficial margin  system  operates  as  a  commendable  restraint  upon 
over-speculation. 

From  our  examination  of  the  trading  in  mining  stocks  recently 
introduced,  we  conclude  that  the  lack  of  experience  of  this  body 
in  this  class  of  business  has  resulted  in  a  neglect  of  proper  safe- 
guards to  the  investor  and  an  undue  incitement  to  speculative 
transactions  of  a  gambling  nature,  and  should  not  be  tolerated 
on  the  Produce  Exchange. 

THE   COTTON    EXCHANGE 

The  New  York  Cotton  Exchange  was  incorporated  by  a  special 
charter  in  1871.  Its  membership  is  limited  to  450.  It  is  now 
the  most  important  cotton  market  in  the  world,  as  it  provides 
the  means  for  financing  about  80  per  cent,  of  the  crop  of  the 
United  States  and  is  the  intermediary  for  facilitating  its  dis- 
tribution. In  fact,  it  is  the  world's  clearing  house  for  the  staple. 
Traders  and  manufacturers  in  Japan,  India,  Egypt,  Great  Brit- 
ain, Germany,  France,  and  Spain,  as  well  as  the  United  States, 
buy  and  sell  here  daily  and  the  business  is  still  increasing. 

Cotton  is  the  basis  of  the  largest  textile  industry  in  the  world. 
The  business  is  conducted  on  a  gigantic  scale  in  many  countries, 
by  means  of  vast  capital,  complicated  machinery,  and  varied 
processes  involving  considerable  periods  of  time  between  the  raw 
material  and  the  finished  product.  Selling  for  future  delivery 
is  necessary  to  the  harmonious  and  uninterrupted  movement  of 
the  staple  from  producer  to  consumer.  Nearly  all  the  trading, 
beginning  with  that  of  the  planter,  involves  short  selling.  The 
planter  sells  to  the  dealer,  the  dealer  to  the  spinner,  the  spinner 
to  the  weaver,  the  weaver  to  the  cloth  merchant,  before  the  cot- 
ton of  any  crop  year  is  picked.  Dealers  who  take  the  risk  of 
price  fluctuations  insure  all  the  other  members  of  this  trading 
chain  against  losses  arising  therefrom  and  spare  them  the  neces- 
sity of  themselves  being  speculators  in  cotton.  The  risks  con- 
nected with  raising  and  marketing  cotton  must  be  borne  by  some- 
one, and  this  is  now  done  chiefly  by  a  class  who  can  give  their 
undivided  attention  to  it. 

GRADING    OF    COTTON 

The  grading  of  cotton  is  the  vital  feature  of  the  trade.     When 


THE  HUGHES  COMMISSION  REPORT  417 

no  grade  is  specified  in  the  contract,  it  is  construed  to  be  mid- 
dling. There  are  now  eighteen  grades  ranging  from  middling 
stained  up  to  fair.  This  classification  differs  somewhat  from 
that  of  other  markets,  and  last  January  the  Department  of 
Agriculture  at  Washington  took  up  the  subject  of  standardizing 
the  various  grades  for  all  American  markets.  The  New  York 
Cotton  Exchange  participated  in  this  work ;  a  standard  was 
thus  adopted,  the  types  of  which  were  supplied  by  its  classifica- 
tion committee.  It  varies  but  little  from  the  one  previously 
in  use  here.  The  samples  chosen  to  represent  the  several  types 
are  now  sealed,  in  possession  of  the  Department  of  Agriculture, 
awaiting  the  action  of  Congress. 

The  cotton  plant  is  much  exposed  to  vicissitudes  of  the  weather. 
A  single  storm  may  change  the  grade  of  the  crop  in  large  sec- 
tions of  the  country.  It  becomes  necessary  therefore  to  provide 
some  protection  for  traders  who  have  made  contracts  to  deliver 
a  particular  grade  which  has  become  scarce  by  an  accident  which 
could  not  be  foreseen.  For  this  purpose  alternative  deliveries 
are  allowed  by  the  payment  of  corresponding  price  differentials, 
fixed  by  a  committee  of  the  Exchange  twice  annually,  in  the 
months  of  September  and  November. 

Settlements  of  trades  may  be  made  individually,  or  by  groups 
of  members,  or  through  a  clearing  system,  the  agency  of  which 
is  a  designated  bank  near  the  Exchange.  No  record  is  kept  of 
the  transactions,  but  it  is  probable  that  for  a  series  of  years  the 
sales  have  averaged  fully  50,000,000  bales  annually. 

INORDINATE    SPECULATION 

There  have  been  in  the  past,  instances  of  excessive  and  un- 
reasonable speculation  upon  the  Cotton  Exchange,  notably  the 
Sully  speculation  of  1904.  We  believe  that  there  is  also  a  great 
deal  of  speculation  of  the  gambling  type  mentioned  in  the  in- 
troduction to  this  report.  In  our  opinion,  the  Cotton  Exchange 
should  take  measures  to  restrain  and,  so  far  as  possible,  pre- 
vent these  practices,  by  disciplining  members  who  engage  in  them. 
The  officers  of  the  Exchange  must  in  many  cases  be  aware  of 
these  practices,  and  could,  in  our  opinion,  do  much  to  discour- 
age them. 

THE     COFFEE    EXCHANGE 

The  Coffee;  Exchange  was  incorporated  by  special  charter  in 
1885.  It  has  320  members,  about  80  per  cent,  active. 


418  APPENDIX 

It  was  established  in  order  to  supply  a  daily  market  where 
coffee  could  be  bought  and  sold  and  to  fix  quotations  therefor. 
in  distinction  from  the  former  method  of  alternate  glut  and 
scarcity,  with  wide  variations  in  price — in  short,  to  create  sta- 
bility and  certainty  in  trading  in  an  important  article  of  com- 
merce. This  it  has  accomplished;  and  it  has  made  New  York 
the  most  important  primary  coffee  market  in  the  United  States. 
But  there  has  been  recently  introduced  a  non-commercial  factor 
known  as  "valorization."  a  governmental  scheme  of  Brazil,  by 
which  the  public  treasury  has  assumed  to  purchase  and  hold  a 
certain  percentage  of  the  coffee  grown  there,  in  order  to  prevent 
a  decline  of  the  price.  This  has  created  abnormal  conditions 
In  the  coffee  trade. 

All  transactions  must  be  reported  by  the  seller  to  the  superin- 
tendent of  the  Exchange,  with  an  exact  statement  of  the  time 
and  terms  of  delivery.  The  record  shows  that  the  average 
annual  sales  in  the  past  five  years  have  been  in  excess  of  16,- 
000,000  bags  of  250  pounds  each. 

Contracts  may  be  transferred  or  offset  by  voluntary  clearings 
by  groups  of  members.  There  is  no  general  clearing  system. 
There  is  a  commendable  rule  providing  that,  in  case  of  a  "cor- 
ner," the  officials  may  fix  a  settlement  price  for  contracts  to 
avoid  disastrous  failures. 

THE    OTHEB    EXCHANGES 

Of  the  exchanges  which  we  have  classed  as  minor,  those  deal- 
ing with  Fruit  and  Hay  appear  to  be  in  nowise  concerned  with 
speculation.  No  sales  whatever  are  conducted  on  them,  all  trans- 
actions being  consummated  either  in  the  places  of  business  of  the 
members  or  at  public  auction  to  the  highest  bidder.  No  quo- 
tations are  made  or  published. 

In  the  case  of  the  other  two  commodity  exchanges,  the  Mer- 
cantile and  the  Metal,  new  problems  arise.  Although  quotations 
of  the  products  appertaining  to  these  exchanges  are  printed  daily 
in  the  public  press,  they  are  not  a  record  of  actual  transactions 
amongst  members,  either  for  immediate  or  future  delivery. 

It  is  true  that  on  the  Mercantile  Exchange  there  are  some 
desultory  operations  in  so-called  future  contracts  in  butter  and 
eggs,  the  character  of  which  is,  however,  revealed  by  the  fact 
that  neither  delivery  by  the  seller  nor  acceptance  by  the  buyer 
is  obligatory ;  the  contract  may  be  voided  by  either  party  by  pay- 
ment of  a  maximum  penalty  of  5  per  cent  There  are  nominal 


THE  HUGHES  COMMISSION  REPORT  419 

"calls,"  but  trading  is  confessedly  rare.  The  published  quota- 
tions are  made  by  a  committee,  the  membership  of  which  is 
changed  periodically.  That  committee  is  actually  a  close  cor- 
poration of  the  buyers  of  butter  and  eggs,  and  the  prices  really 
represent  their  views  as  to  the  rates  at  which  the  trade  generally 
should  be  ready  to  buy  from  the  farmers  and  country  dealers. 

Similar,  but  equally  deceptive,  is  the  method  of  making  quo- 
tations on  the  Metal  Exchange.  In  spite  of  the  apparent  ac- 
tivity of  dealings  in  this  organization  in  published  market  re- 
ports, there  are  no  actual  sales  on  the  floor  of  the  Metal  Ex- 
change, and  we  are  assured  that  there  have  been  none  for  sev- 
eral years.  Prices  are,  however,  manipulated  up  and  down  by 
a  quotation  committee  of  three,  chosen  annually,  who  represent 
the  great  metal  selling  agencies  as  their  interest  may  appear, 
affording  facilities  for  fixing  prices  on  large  contracts,  mainly 
for  the  profit  of  a  small  clique,  embracing,  however,  some  of 
the  largest  interests  in  the  metal  trade. 

These  practices  result  in  deceiving  buyers  and  sellers.  The 
making  and  publishing  of  quotations  for  commodities  or  securi- 
ties by  groups  of  men  calling  themselves  an  exchange,  or  by  any 
other  similar  title,  whether  incorporated  or  not,  should  be  pro- 
hibited by  law,  where  such  quotations  do  not  fairly  and  truth- 
fully represent  any  bona-fide  transactions  on  such  exchanges. 
Under  present  conditions,  we  are  of  the  opinion  that  the  Mer- 
cantile and  Metal  Exchanges  do  actual  harm  to  producers  and 
consumers,  and  that  their  charters  should  be  repealed. 

THE    EXPERIENCE   OF   GERMANY 

In  1892  a  commission  was  appointed  by  the  German  Govern- 
ment to  investigate  the  methods  of  the  Berlin  Exchange.  The 
regular  business  of  this  Exchange  embraced  both  securities  and 
commodities ;  it  was  an  open  board  where  anybody  by  paying  a 
small  fee  could  trade  either  for  his  own  account,  or  as  a  broker. 
The  broker  could  make  such  charge  as  he  pleased  for  his  serv- 
ices, there  being  no  fixed  rate  of  commission.  Settlements  took 
place  monthly.  Margins  were  not  always  required.  Under  these 
circumstances  many  undesirable  elements  gained  entrance  to  the 
Exchange  and  some  glaring  frauds  resulted. 

The  commission  was  composed  of  government  officials,  mer- 
chants, bankers,  manufacturers,  professors  of  political  economy, 
and  journalists.  It  was  in  session  one  year  and  seven  months. 
Its  report  was  completed  in  November,  1893.  Although  there  had 


420  APPENDIX 

been  a  widespread  popular  demand  that  all  short-selling  should 
be  prohibited,  the  commission  became  satisfied  that  such  a  policy 
would  be  harmful  to  German  trade  and  industry,  and  they  so 
reported.  They  were  willing,  however,  to  prohibit  speculation 
in  industrial  stocks.  In  general  the  report  was  conservative  in 
tone. 

THE  LAW  OF   1896 

The  Reichstag,  however,  rejected  the  bill  recommended  by  the 
commission  and  in  1§96  enacted  a  law  much  more  drastic.  The 
landowners,  constituting  the  powerful  Agrarian  party,  contended 
that  short-selling  lowered  the  price  of  agricultural  products,  and 
demanded  that  contracts  on  the  Exchange  for  the  future  delivery 
of  wheat  and  flour  be  prohibited.  The  Reichstag  assented  to 
this  demand.  It  yielded  also  to  demands  for  an  abatement  of 
stock  speculation,  and  prohibited  trading  on  the  Exchange  in  in- 
dustrial and  mining  shares  for  future  delivery.  It  enacted  also 
that  every  person  desiring  to  carry  on  speculative  transactions  be 
required  to  enter  his  name  in  a  public  register,  and  that  specu- 
lative trades  by  persons  not  so  registered  should  be  deemed 
gambling  contracts  and  void.  The  object  of  the  registry  was 
to  deter  the  small  speculators  from  stock  gambling  and  restrict 
speculation  to  men  of  capital  and  character. 

The  results  were  quite  different  from  the  intention  of  the 
legislators.  Very  few  persons  registered.  Men  of  capital  and 
character  declined  to  advertise  themselves  as  speculators.  The 
small  fry  found  no  difficulty  in  evading  the  law.  Foreign  brok- 
ers, seeing  a  new  field  of  activity  opened  to  them  in  Germany, 
flocked  to  Berlin  and  established  agencies  for  the  purchase  and 
sale  of  stocks  in  London,  Paris,  Amsterdam,  and  New  York. 
Seventy  such  offices  were  opened  in  Berlin  within  one  year  after 
the  law  was  passed,  and  did  a  flourishing  business.  German 
capital  was  thus  transferred  to  foreign  markets.  The  Berlin 
Exchange  became  insignificant  and  the  financial  standing  of 
Germany  as  a  whole  was  impaired. 

DETRIMENTAL    CONSEQUENCES 

This,  however,  was  not  the  most  serious  consequence  of  the 
new  law.  While  bankers  and  brokers,  in  order  to  do  any  busi- 
ness at  all,  were  required  to  register,  their  customers  were  not 
compelled  to  do  so.  Consequently  the  latter  could  speculate 


THE  HUGHES  COMMISSION  REPORT  421 

• 

through  different  brokers  on  both  sides  of  the  market,  pocketing 
their  profits  and  welching  on  their  losses  as  gambling  contracts. 
Numerous  cases  of  this  kind  arose,  and  in  some  the  plea  of 
wagering  was  entered  by  men  who  had  previously  borne  a  good 
reputation.  They  had  yielded  to  the  temptation  which  the  new 
law  held  out  to  them. 

Another  consequence  was  to  turn  over  to  the  large  banks  much 
of  the  business  previously  done  by  independent  houses.  Persons 
who  desired  to  make  speculative  investments  in  home  securities 
applied  directly  to  the  banks,  depositing  with  them  satisfactory 
security  for  the  purchases.  As  the  German  banks  were  largely 
promoters  of  new  enterprises,  they  could  sell  the  securities  to 
their  depositors  and  finance  the  enterprises  with  the  deposits. 
This  was  a  profitable  and  safe  business  in  good  times,  but  at- 
tended by  dangers  in  periods  of  stringency,  since  the  claims  of 
depositors  were  payable  on  demand.  Here  again  the  law  worked 
grotesquely,  since  customers  whose  names  were  not  on  the  public 
register  could,  if  the  speculation  turned  out  badly,  reclaim  the 
collateral  or  the  cash  that  they  had  deposited  as  security. 

MODIFICATION     OF    LAW    IN     1908 

The  evil  consequences  of  the  law  of  1896  brought  about  its 
partial  repeal  in  1908.  By  a  law  then  passed  the  government 
may,  in  its  discretion,  authorize  speculative  transactions  in  in- 
dustrial and  mining  securities  of  companies  capitalized  at  not 
less  than  $5,000,000 ;  the  Stock  Exchange  Register  was  abolished ; 
all  persons  whose  names  were  in  the  "Handelsregister"  (com- 
mercial directory),  and  all  persons  whose  business  was  that  of 
dealing  in  securities,  were  declared  legally  bound  by  contracts 
made  by  them  on  the  Exchange.  It  provided  that  other  persons 
were  not  legally  bound  by  such  contracts,  but  if  such  persons 
made  deposits  of  cash  or  collateral  security  for  speculative  con- 
tracts, they  could  not  reclaim  them  on  the  plea  that  the  con- 
tract was  illegal. 

Insofar  as  the  Reichstag  in  1896  had  aimed  to  prevent  small 
speculators  from  wasting  their  substance  on  the  Exchange,  it 
not  only  failed,  but,  as  we  have  seen,  it  added  a  darker  hue  to 
evils  previously  existing. 

Germany  is  now  seeking  to  recover  the  legitimate  business 
thrown  away  twelve  years  ago.  She  still  prohibits  short  selling 
of  grain  and  flour,  although  the  effects  of  the  prohibition  have 
been  quite  different  from  those  which  its  supporters  anticipated. 


422  APPENDIX 

As  there  are  no  open  markets  for  those  products,  and  no  con- 
tinuous quotations,  both  buyers  and  sellers  are  at  a  disadvantage ; 
prices  are  more  fluctuating  than  they  were  before  the  passage 
of  the  law  against  short-selling. 

THANKS    TO    THE    CHAMBEB    OF    COMMERCE 

Our  cordial  thanks  are  due  to  the  Chamber  of  Commerce  of 
the  State  of  New  York,  for  the  free  use  of  rooms  in  its  building 
for  our  sessions,   and  of  its  library,  and  other  facilities. 
Respectfully  submitted, 

HORACE   WHITE.    Chairman, 
CHARLES   A.    SCHIEREN, 
DAVID    LEVENTRITT, 
CLARK   WILLIAMS, 
JOHN  B.  CLARK, 
WILLARD   V.   KING, 
SAMUEL   H.   ORDWAY, 
EDWARD  D.  PAGE, 
CHARLES    SPRAGUE   SMITH, 
MAURICE  L.  MUHLEMAN,  Secretary. 


INDEX 


29 


INDEX 


Abbreviations,   used   in   report- 
•     ing  quotations  on  the  tape, 

184. 

Adams,  Charles  Francis,  ac- 
count of  the  Erie  Wars,  by, 
23. 

Adams,  Henry,  209. 
Advertising,  abuse  of,  407. 
financial,   207. 

New  York  and  London  Stock 
Exchange  rules  regarding, 
373-74. 

Allotment  sheet,  179. 
Alternative  contracts,  414. 
American  Tobacco  Co.,  suit  to 

dissolve,  30. 

Annual  reports,  when  to  be  pub- 
lished, 130. 

Arbitrage,  description  of,  158. 
transactions  in,  started,   20. 
Assay  office,   building  of,  319. 
establishment  of,   16. 
work  of,  317. 
Assignments,    rules    governing, 

149-50. 
Assistant  treasurer,  importance 

of  the  office  of,  313. 
Austin,  O.  P.,  statement  by,  re- 
garding  balance   of   trade, 
332. 

Averages,  law  of,  102. 
method  of,  in  making  of  bank 
statement,  293. 


Bacon,    Lord,    on    chopping   of 
bargains,  68. 


Bagehot,     Walter,     the     stupid 
money  of  stupid  people,  370. 
value  of  time  in  trade  opera- 
tions, 182. 
Baker's  Hotel,  30. 
Balance  of  trade,  estimates  of, 

334-335. 

significance  of,  330. 
Bank  clearings,  243. 
Bank  of  England,  action  by,  in 

the  Baring  crisis,  338. 
discount  rate  of,  311. 
statement  of,  310,  311. 
Bank  statement,   actual  figures 

in,  300. 

analyzing  the,  299. 
four  most  important  items  of, 

299. 

manipulation  of,  305. 
when  issued,  293. 
Bank,    United    States,    contest 

over,  357. 

Bankers,  private,  field  of  opera- 
tions of,   341. 
Banking  power   of   New   York, 

57. 
Banks,    certification    agreement 

with,  272. 

description  of  commercial,  255".. 
first   organization   of,   6. 
growing  size  of,  255. 
Barings,  suspension  of  the,  25, 

358. 

Barker,   Jacob,   10,  31. 
Barron,   C.    W.,   on   benefits   of 
banking  concentration,  259. 


425 


426 


INDEX 


Beecher,  Henry  Ward,  opinion 
of,  on  a  speculative  tran- 
saction, 88. 

Beluiont,  August,  9,  135. 
Bibliography,  34,  35,  48,  57,  90, 
103,  124,  162,  181,  208,  226, 
233,  251,  264,  291.  320,  339, 
363,   also  preface. 
Biddle,  Nicholas,  9,  30. 
Bids  and  offers,  methods  of,  143. 
rules  of  Stock   Exchange  re- 
garding. 392-3. 
Big  Business,  28. 
Black  Friday,  20,  358. 
Bleeker,  Leonard,  5. 
Board  of  Trade  Case,  Supreme 

Court  decision  in,  83. 
Board  room,  description  of,  156. 
Boer  War,  effect  of,  359. 
Bond  departments,  bank,  264. 
Bond  houses,  207. 
Bonds,   dealings   in,   150. 
description  of,  121. 
selling  of,  206,  207. 
Bourse,  Paris,  3. 
Boutwell,  Secretary  George  S., 
order     of,     to     sell     gold, 
22. 

Bradstreet's,   244. 
Branch  offices,   luxury  of,  395- 

396. 
number  of,  belonging  to  Stock 

Exchange   firms,    135. 
rules  of  Stock  Exchange,  gov- 
erning, 396. 

Broker,    an    agent,    under    de- 
cision by  Justice  Day,  220. 
choice  of,  213. 
early  use  of  term,  2. 
legal  relations  of  a  customer 

to,  224. 
office,  of.  215,  216. 


Brokers,    activity    and   nervous 

strain  of,  145,  146. 
advice  of,  217. 
breadth   and   narrowness   of, 

210. 

different  kinds  of,  210. 
examinations  of  accounts  .of, 

389. 

how  they  obtain  credit,  267. 
operations  of  bogus,  372. 
speculation  by,   223. 
Brokers'  checks,  certification  of, 

272. 

Brown  Bros.  &  Co.,  9. 
Bryan,  William  J.,  effect  of  fear 

of  the  election  of,  99. 
opinion  by,  of  margin  transac- 
tions, 383. 

Bryce,    James,    compares    Lon- 
don  and   New    York   Stock 
Exchanges,  157. 
statement    of,    in    regard    to 
power  of  the  Secretary  of 
the  Treasury,  312. 
Bucket    shops,     law    of    New 
York,  making  it  a  felony  to 
keep,  409. 
operations  of,  372. 
rule  of  Stock  Exchange  in  re- 
gard  to,   410. 
Bulls  and  bears,  definitions  of, 

71,   72. 

Butler,  Nicholas  Murray,  state- 
ment by,  regarding  the 
greatness  of  the  stock  com- 
pany, 104. 

Cable,  laying  of,  20. 

use  of,  in  Wall  Street,  190. 
Cammack,  Addison,  32. 
Cannon,  James  G.,  on  commer- 
cial education,  236. 


INDEX 


427 


Capel  Court,  43. 
Capital,  amount  of  exported,  55. 
Capitalization,  113. 
Carnegie,     Andrew,     statement 
by,    regarding    speculation, 
66. 

Carrier   pigeons,   early   use   of, 

in  financial  operations,  190. 

Cash  and  regular,  meaning  of, 

146. 

Certification,  amount  of,  272. 
description  of,  268. 
law  of,   270. 

Chamber  of  Commerce,  organi- 
zation of,  5. 

the  merchants'  forum,  41. 
Change  Alley,  3,  9. 

early  market  in,  198. 
Character,  as  a  business  asset, 

270. 

Chicago  fire,  359. 
Chronicle,   commercial,   239. 
Circulation,  bank  note,  361. 
Civil   War,  financial  character- 
istics during,  357. 
speculation  during,  18. 
transactions  during  the,  20. 
Clearance  sheets,   174. 
Clearance  ticket,    192. 
Clearing,  method  of,  p.  260. 
Clearing     House,     foreign     ex- 
change    an     international, 
324. 

Clearing  House,  Bank 
account  of,  259. 
action  in   Baring  crisis,   358. 
examinations  by,  263. 
organization  of,  16. 
situation  of,  38. 
Clearing    House,    stock,    estab- 
lishment of,  20. 
capacity  of,  167. 


history  of,  163. 
work  of,  168. 

Clearing  house  Certificates,  361. 

Clearing  house  draft,   175. 

Clearing  Houses,  functions  of, 
262. 

Clearings,  secrecy  of  stock,  179. 
statistics  of  bank,  56,  263. 

Clerks,   speculation  by,  390. 

Clews,  Henry,  31,  371. 

Codes,  use  of  cable,  191. 

Coffee  exchange,  account  of,  39, 
417. 

Coin,  abrasion  of,  318. 
value  of,  318. 

Collateral,  methods  in   scrutin- 
izing, 287. 
stock  securities  used  as,  266. 

Commerce,  volume  of,  56,  243, 
331. 

Commercial  crises,  phenomena 
of,  351-2. 

Commercial  education,  235. 

Commissions,  criticism  of  sums 
paid  in,  for  underwriting, 
etc.,  347. 

rates  of  stock,  first  establish- 
ed, 8. 
rates  of  Stock  Exchange,  140. 

Commission  houses,  work  of, 
214. 

Comparisons,  explanation  of, 
148. 

Competition,  banking,  259. 

Conant,  Charles  A.,  on  mobility 

of  exchanges,  46. 
on  total  of  securities,  49. 

Concentration,  financial,  258. 

Conner,  W.  E.,  32. 

Consolidated  Stock  Exchange, 
140. 

Cooke,    Jay,    25,    31. 


428 


INDEX 


Cooperation,   1. 

advantages  of,  104. 
Copper,  200. 
Corporation  lawyer,  services  of 

the,  107. 

Corporation  problem,  114. 
Corporation   reports,    value   of, 

246. 
Corporations,  number  of,  in  the 

United  States,  49. 
Corners,  definition  of,  368. 
Erie,  370. 

Hamilton  and  St  Joseph,  140. 
history  of,  369. 
Hughes  Commission  on,  387. 
the    Northern    Pacific    flurry, 

27. 

Cost  of  living,  245. 
Cotton    Exchange,    account    of, 

416. 

building  of,  39. 
tickers  of,  189. 
Covered,   definition  of,  72. 
Credit,  amount  of  business  con- 
ducted on,  252. 
economic  value  of,  253. 
how  brokers  obtain,  267. 
inverted  pyramid  of,  304. 
phenomena  of,  351. 
proportion  of  cash  reserve  to, 

254. 

rates  for,  252. 
state  of,  325. 
three  classes  of,  290. 
Crisis,  forecasting  a,  354. 
Crop   movement,    effect   of,   on 

money  market,  309. 
Crop  reports,  when  issued,  241. 
Crops,   economic  importance  of 

the,   240. 

Crump,  Arthur,  190. 
Curb  market,  early,  3. 


capitalization     of     securities 

dealt  in  on  the,  200. 
history  of  early,  198. 
operations  of,  405. 
organization  of,  200. 
periods  of  activity  in  the,  199. 
places  where  it  has  been  lo- 
cated, 198. 

report  of  Hughes  Commission 
f       on,  404. 
Customer,  broker's  statement  of 

the  account  of  his,  219. 
control  by,  of  his  account,  221. 
introduction  of,  to  a  broker, 

217. 
relations  to  his  broker  of  a, 

213. 

Custom   House,  38. 
Cycle  theory,  account  of,  352. 

Day,    Justice   William    R.,   de- 
cision   of,    holding    that   a 
broker  is  an  agent,  222. 
Deficit,  fear  of  a  reserve,  303. 
Definitions   of   terms : 

active,  228. 

advance,  228. 

alternative  contracts,  414. 

arbitrage,  158. 

assignments,  149. 

backwardation,  233. 

balance,  229. 

balance  of  trade,  330. 

ballooned,  228. 

bank  statement,  292. 

banker,  228. 

bear,  72-3,  228-9. 

bear  raid,  72. 

Big  Four,   232. 

blind  pool,  229. 

boom,  228. 

broker,   210,   228. 


IXDEX 


429 


bucket  shop,  372. 

bull,  72-3,  2>8-9. 

cable  transfers,  322. 

call,  228. 

call  loans,  275. 

carrying  charges,  232. 

cash,  146. 

cash  reserves,  299. 

certification,  268. 

Clearing  House,   258,  262. 

clearings,  163. 

clears,  229. 

clique,  228. 

collateral,   266. 

combine,   228. 

commercial  banks,  255. 

commercial  bills,  321. 

commercial   crises,   350. 

commission  house,  214. 

communities  of  interest,  233. 

comparisons,  148. 

comparison  slip,  229. 

contango,  233. 

coppered.  228-9. 

corner,  230,  368. 

covered,  228. 

credit  instruments,  252. 

curb  market,  198. 

customer,  229. 

cycle  theory,  352. 

dead  line,  303. 

deal,  228. 

decline,  228. 

depository   banks,   257. 

deposits,   302. 

deliveries,   149. 

descretionary  order,  217. 

.drive,  228. 

ex-dividend,  228. 

finance  bills,  ^22. 

flier,  228,  231. 

floor  traders,   381. 


flurry,  228,  230. 

foreign   Exchange,  321-2. 

futures,  413. 

gentlemen's  agreements,  233. 

gold  shipments,  336. 

gunning,  228,  231. 

hedged,  228. 

hedging,  414. 

hoarding,  253. 

holding   companies,   111,   400. 

insider,   74,  228. 

interior  movement,  306. 

investment,  202. 

investor,  228,  381. 

jobbers,  161,  233. 

kite  flying,  228,  233. 

lambs,  66,  228-9. 

letters  of  credit,  322. 

liquidate,  229. 

listing,   125. 

loaded,   228. 

loan  certificate,  359. 

loan  envelope,  281. 

long,  72,  228. 

manipulation,    228,    364,    285. 

matched  orders,   228,   285. 

margin, » 220,  229. 

marketability,   204. 

market  letters,  224. 

money  loans,  271. 

money  market,  252. 

money  power,  258. 

money  rates,  252. 

money   reserve,   256. 

net  deposits,  300. 

news  slips,  192. 

Nickel  Plate,  232. 

operator,  228. 

options,  147. 

order,  228. 

out  of  town  loans,  266. 

over-certification,  269. 


430 


INDEX 


panics,  350. 

par,  232. 

par  value,  103. 

lagged,  228,  230. 

plunger,  66,  228. 

point,  228. 

pool,  228-9. 

premium,  232. 

principal,  228-9. 

privileges,  231. 

professional,  72,  228-9. 

promoter,  106. 

proxy,   118. 

public.  73,  228,  231. 

puts,  228. 

pyramiding,   228,   230,   383. 

rally,  228. 

realize.  228-9. 

reacts,  228-230. 

recover,  228. 

regular,  146. 

reserve  cities,  256. 

rehypothecation,  214,  389. 

rigged,   230. 

ring  settlements,  379. 

room  traders,  136,  228. 

savings  banks,  255. 

scalpers,  228-9. 

seats,  138. 

security    bills,    322. 

security  loans.  289. 

shearing.  228.  231. 

short,    72.   228-9. 

short  selling.  151,  383. 

slump,  229. 

soft,  228. 

specialist,    137,    228,    394. 

speculation,    63-6,    78,    378. 

speculator,   229. 

spread,  228,  231. 

squeezed,  228. 

stagnant,  228,  230. 


sterling  loans,   338. 

stock  exchange,  133. 

stock  exchange  banks,  '266. 

stock  jobbing,  233. 

stock  market,  58. 

stock  watering,  113. 

stop  order,  228. 

straddled,   228,   231. 

strong.   228,   230. 

substitutions,  282. 

surplus  revenue,  299. 

syndicate,  108,  228. 

tape,  182,  229,  237. 

technical  position,  248. 

ticker,  182-3. 

time  loans,  278. 

tips,  229,  365. 

trust,  110. 

two  dollar  brokers,  136. 

tinder  the  rule,  141. 

underwriting,  107,  344-5. 

unit  of  trading,  391. 

usury,  403. 

wash    sales,    147,    228,    231, 
365,  367. 

watered  stock,  228. 

weak,  228,  230. 

window   dressing,   294. 

wiped  out,  228. 
De  Foe,   Daniel,   attacks  stock 

Jobbing.  2. 

Deliveries,  rules  governing,  149. 
Deposit  currency,  1. 
Dill,  James  B..  remarks  of,  on 

capitalization,  114. 
Discounting  the  future,  96. 
Discretionary  order,  217. 
Dividends,  150. 

in  their  relation  to  prices,  94. 
Dodsworth,  William,  197,  334. 
Domestic  trade,  how  measured, 
243. 


INDEX 


431 


Dos  Passes,  John  R.,  on  juris- 
diction of  Stock  Exchange, 
134. 

on    influence    of    Stock    Ex- 
changes, 61. 

Dow,  Charles  H.,  366. 

Dow,  David,  31. 

Dow,  Jones  &  Co.,  192,  307. 

Dow  theory  of  price  movements, 
98. 

Drew,  Daniel,  23. 

Drexel,   A.  J.,  358. 

Dun  &  Co.  R.  G.,  244,  249,  354. 

Dun's  Review,  249,   322. 

Eames,  Francis  L.,  156. 
historian  of  Stock  Exchange, 

32. 

on  bogus  brokers,  372-3. 
services  in  establishing  Stock 

Clearing  House,  164. 
East  India  Company,  2. 
Education,  need  of,  in  modern 

business,  236. 
trie,  corners  in,  370. 
Erie  Canal,  influence  of,  9. 
Erie  Wars,  23. 
Escher,  Franklin,  account  by,  of 

finance  bills,  322. 
Exchange,    evolution   in   means 

of,  292. 
Exchanges,   international   items 

of,  333. 

Ex-Dividend,  meaning  of,  150. 
Expulsions,    number    of    Stock 

Exchange,  139-40. 

Failures,    chart    and    statistics 
showing    relation    between 
bank  clearings  and  commer- 
cial, 354-5. 
Hughes     Commission     recom- 


mendations   regarding  bro- 
kers', 388 

Fictitious  trades,  391. 
Field,  Cyrus   W.,  20,   31. 
Finance  bills,  account  of,  322. 
Financial   authorities,   239. 
Financial     concentration,     fear 

of,  116. 

Fink,  Albert, '248. 
Fire  in  Wall  Street  in  1835,  13. 
Fisk,  James,  22,  31. 
Floor  traders,  381. 
Flower,  R.  P.,  32,  212. 

effect  of  death  of,  27,  359. 
Foreclosure,  process  of,  122. 
Foreign  exchange,  different  bills 

of,    321-2. 
evolution  of,  324. 
balances  in,  327-8. 
mechanism  of  the  market  for, 

321. 

misconceptions  regarding,  324. 
Foreign  securities  listed.  53. 
Fourth    National    Bank,    state- 
ment of,   regarding  Ameri- 
can credits  abroad,  329. 
Free    Banking    Law    of    New 

York,  15. 

Fulton,  Robert,  8. 
Futures,  dealings  in,  413. 

Gage,   Lyman  J.,  on  rates  for 

credit,  252. 

Gambling,  definition  of,  78. 
is  a  disease,  65. 
what  constitutes  stock,  378. 
Garfield,    James    A.,    assassina- 
tion of,  358. 
investigation  of  Black  Friday 

by,  20. 

speech  of,  in  Wall  Street,  320. 
Garrett,   Robert,   31. 


432 


INDEX 


George,  Henry,  declares  specu- 
lation    to    be     a    balance 
wheel,  87. 
Germans,    business    success   of 

the,  235. 

Gold,  bars  of,   made  in  assay 
office,  318. 

computing  cost  of  shipments 
of,  336-8. 

conspiracy,  20. 

corner  in,  369. 

discovery    of,    in    California, 
357. 

discovery  of,  in  California  and 
Australia,   16. 

dread  of  shipments  of,  330. 

economic   significance   of   the 
production   of,  242. 

effect  of  speculation  in,  84-5. 

price  of  bars  for  export,  318. 

speculation  in,  19. 

sub-treasury   chief   office    for 

export.  315. 

Gold  exchange,  organization  of, 
19. 

operators  in  the,  211. 
Gouge,  William  M.,  account  by, 
of     first     American     panic, 
356. 

Gould,  George  J.,  32,  135. 
Gould,  Jay,  31. 

Henry  Adams'  description  of, 
209. 

in  the  Erie  Wars,  23,  24. 

on  effect  of  advance  in  price 
of  gold,  22. 

statement    by,    in    regard    to 
speculation,  65. 

story  of,  showing  how  he  con- 
cealed his  operations,  366. 
Governing  Committee,  member- 
ship and  authority  of,  155. 


Government  deposits  in  banks, 

314. 

Government  finances,  313. 
Government  publications,  239. 
Grant,  U.  S.,  failure  of,  in  1884, 

25. 
on    the    country's     fictitious 

prosperity,  25. 


Hadley,  Arthur  T.,  defines  spec- 
ulation, 81,  87. 
on  speculation  in  gold,  85. 

Hamilton,  Alexander,  5,  30,  42. 

Hamilton  W.  P.,  describes 
method  of  reporting  London 
prices,  160. 

Hannibal  and  St.  Joseph,  corner 
in,  369. 

Harlem,  corner  in,  370. 

Harlem  stock,  speculation  in,  12. 

Harrirnan,  E.  H.,  The  "Colossus 
of  Roads,"  32. 

Hatch,  A.   S.,   failure  of,  25. 

Hay,  John,  on  the  financial  cen- 
ter. 43. 

Hedging,    definition   of,   414. 

Hepburn,    A.    Barton,    on   irre- 
sponsive currency,  361. 
on  the  Chamber  of  Commerce 
and  the  Clearing  House,  41. 

Hirst,  F.  W.,  Preface 
declares  that  Wall  Street  is 
mirror    of    American    busi- 
ness, 76. 

on  methods  of  London  Stock 
Exchange,  157. 

Hoarding,  Evil  of,  253. 

Holding  Companies,  Description 

of,  111. 

opinion  of,  made  by  Railroad 
Securities  Commission,  112. 


INDEX 


433 


Hughes  Commission  report  on, 

400-401. 

Holidays,   154-5. 
Hone,  Philip,  on  effect  of  fail- 
ure of  United  States  Bank, 
13. 
description  of  Wall  Street  by, 

14. 

How's  London,  description  of 
how  London  prices  are  re- 
ceived, 160. 

Hudson  Bay  Company,  2. 
Hughes  Commission,  77,  80,  82. 
urges  frequent  statements  of 

financial  condition,  126. 
report,  375. 

Hughes,  Governor,  appoints 
commission  to  investigate 
Stock  Exchange,  376. 

Industrial    Commission,    recom- 
mendation of,  114. 
Industrials,   groups  of,   75. 
Industries,  development  of  the 

country's,  242. 
Insiders,  definition  of,  74 
Insurance  companies,  amount  of 

securities  held  by,  51. 
Interest,  decline  in  rates  of,  274. 
rate  of,  205. 
rate  of,  charged  by  brokers. 

220. 
Investments,  different  classes  of, 

202. 

five  standpoints  of,  204. 
machinery  of,  203. 
misuse  of  the  word,  79. 
stock   exchange  a  place   for, 

61. 

task  of,  202. 
Investors,  381. 
Iron,  242. 


Iron  Age,  243. 

Jackson,    Andrew,    opposed    to 

banks,  253. 

war    of,    on    United    States 
Bank,  10. 

Jenks,    J.    F.,    definition    of    a 
trust,  by,  111. 

Jevons,  W.  Shanley,  on  the  cy- 
cle theory,  352. 
statement  by,  regarding  econ- 
omy   of   foreign    exchange, 
327. 

Jobbers,  term  described,  161-2. 

Journal  of  Commerce,  239,  337. 

Kaempfert,  Waldemar,  235. 
Keene,   James  R.,  32,   136. 
skill  of,  74. 
type  of  skillful  manipulator, 

367. 

Kinley,  David,  on  credit  instru- 
ments, 252. 

Lackawanna,   corner  in,   370. 
"Lambs,"  definition  of,  66. 
Law,  John,  failure  of,  3. 

promoter   of   the    Mississippi 

scheme,  351. 
Legal  Reserves,  amount  of,  257, 

300. 

Life  Insurance  Companies,  39. 
Lincoln,   Abraham,   his   opinion 

of  the  speculation  in  gold, 

84. 

Listing    of    securities,    require- 
ments for,  128. 

requirements  in  regard  to, 

390. 

statistics  of,  131. 
Listed  securities,  amount  of,  52. 
Loans,  analysis  of,  402. 


434 


INDEX 


advantages  of  security,  289. 
call,  account  of,  275. 
foreign,  influence  of,  329. 
morning,   account  of,  271. 
out  of  town,  266. 
Stock  Exchange,  273. 
time,  account  of,  278. 
Loan  certificates,  mechanism  of, 

359. 
Loan      Committee      of      1893, 

achievement  of  the,  26. 
Lombard  Street,  43. 
London  orders,  on  the  New  York 

stock   market,    159. 
London  prices,  first  received  by 

cable,  20. 

London  Statist,  245. 
Long,  definition  of,  72. 

Macauley,  Thomas  B.,  account 
of  beginning  of  stock  mar- 
ket by,  2,  59. 

source  of  his  materials  for 
account  of  early  stock  mar- 
ket, 197. 

MacLeod,  Henry  D.,  definition 
by,  of  a  Clearing  House, 
259. 

Manipulation,  97. 
definition  of.  364. 
devices  of,  367. 
dispute  as  to  extent  of,  386. 
methods  of,  385. 
Manipulators,  381. 
Manuals,  239. 
Margins,  amount  of,  demanded 

by  brokers,  220. 
trading  on,  382. 
Marine  Bank,   failure  of,  25. 
Maritime  Exchange,   38. 
Market,  example  of  reading  the, 
249. 


Marketability,  62. 
Market  evolution,  stages  of,  33. 
Matched  orders,  use  of,  in  man- 
ipulation, 385. 
Market   letters,   224. 
Market  reports,  early,  11. 

service  of,  196. 
McKinley  boom,  27,  99,  101. 
McKinley,    William,    effect    of 
assassination  of,  190,  360. 
Medbury,  James  K.,  190. 
Mendels,  Jr.,  E.  S.,  200. 
Mercantile    Exchange,    418. 
Metropolitan   Bank,   failure  of, 

25. 

Middle  West,  settlement  of,  7. 
Mills,  John,  on  the  cycle  theory, 

352. 
Mississippi  Bubble,  3,  198. 

the  first  panic  of,  351. 
Money,    influence   of    rates    of, 

328. 
three  principal  movements  of, 

306. 

transfers  of,  315. 
Money   Market,   different  ways 
in  which  the  stock  market 
connects  with  the,  266-7. 
division  of,  48. 
effect  of,  on  speculation,  402. 
plant  of  the,  264. 
Money  Power,  258. 
Monopoly,    promoted    by    stock 

corporations,    116. 
Morgan,  J.  Pierpont,  32,  42,  136. 
banking  house  of,  340. 
greatest  product  of  the  Street, 

342. 
leadership    of,    in    panic    of 

1907,   29. 

public  interest  in  conferences 
with,  344. 


INDEX 


435 


testimony  of,  in  Northern  Se- 
curities Case,  342-3. 
Morris  Canal,  corner  in,  10,  369. 
sales,  subscriptions  for,  8. 

Napoleon,    lays    cornerstone    of 

Paris    bourse,   61. 
National   Bank  Act,   enactment 

of,  18. 
National  Monetary  Commission, 

plan  of,  362-3. 

Net  deposits,  method  of  comput- 
ing, 300. 
New  Jersey,   incorporations  in, 

109,  110. 

New  York,  Bank  of,  founding  of, 
commercial      supremacy      of, 

state  of,  9. 

New  York  Curb  Association,  or- 
ganization of,  200. 
New  York  News  Bureau,  192-4. 
New  agencies,  value  of,  in  the 

Wall        Street        markets, 

192. 

News,  dissemination  of,  159. 
News    tickets,     description    of, 

194-6. 
Nicknames,    of    leading    stocks, 

185. 

Northern  Pacific,  corner  in,  380. 
Northern    Securities    Company, 

suit  against  the,  28. 
Norton,  Eliot,  on  legal  relations 

between  a  broker  and  his 

client,  224. 
on   legal  standpoint  of  stock 

brokerage,  214. 

Ohio  Life  &  Trust  Co.,  failure 

of,  17. 

Open  Board  of  Brokers,  19,  21. 
Operators,  number  of,  71. 


Options,  description  of,  147. 
Overcertification,  description  of, 

269. 
Overend,  Gurney  &  Co.,  failure 

of,  25,  358. 
Overspeculation,  67. 

Pads,  brokers',  143-4. 
Page  printer,  specimen  of,  194. 
Paish,  George,  definition  of  bal- 
ance of  trade,   by,   330. 

estimate    by,    of   balance   of 

trade,  335. 
Panic,  Baring,  25. 

Black  Friday,  20-22. 

of  1812,  7. 

of  1837,  10,  12. 

of  1857,  17. 

of  1873,  25. 

of  1884,  25. 

of  1893,  26,  358,  389. 

of  1907,  29,  359,  376. 

how      covering      by      shorts 
checked,  385. 

Northern  Pacific,  27. 

Venezuelan,   26. 
Panics,  definitions  of,  350. 

first  stock,  3. 

history  of,  356-9. 

international  scope  of,  359. 

regularity  of,  350-1. 

safeguards  against,   359. 

succession  of  booms  and,  349. 
Paris    Bourse,     Napoleon    lays 

cornerstone  of,  61. 
Par  value,  105,  117. 
Patron,  Maurice,  292. 
Philadelphia,    early    supremacy 

of,  9. 

Plungers,  definition  of,  66. 
Politics,  relation  of,  to  the  mar- 
kets, 240. 


436 


INDEX 


Pool,  foundation  of  a,  360. 
Price  Index   numbers,  245. 
Price  movements,  249. 
Prices,  Dow  theory  of  movement 

of,  98. 
law  of  averages  In  movement 

of.    102. 
method  of  receiving  London, 

160. 

movements  of,  75. 
phenomena  of  changes  in,  92. 
relation  between  security  and 

commodity,  245. 
Woodlock    statement    regard- 
Ing  the  movement  of,  103. 
Prime,  Nathaniel,  31. 
Private    bankers,    function    of, 

340. 
Produce  Exchange,  account  of, 

415. 

building  of,  38. 
tickers   of,    189. 

Professionals,  definition  of,  72. 
Promoter,  work  of,   106. 
Promotion,  criminal,  117. 
Proxy,  control  by,  118-9. 
Public,  definition  of,  73. 
Publicity,    agencies   of,    238. 
more  complete  banking,  402. 
value  of,  127. 
Pyramiding,  definition  of,  383. 

Quantitative  theory,   242. 
Quotations,  91. 

sales  of,  411. 

the  Stock  Exchange  does  not 
guarantee,  189. 

Railroad  cars  In  use,  244. 

Railroad  earnings,  243. 

Railroad  reports,    analysis    of, 
247. 


Railroad  securities,  53. 
beginning   of   speculation   in, 

9-10. 

Commission,  extracts  from  re- 
port of,  106,  112. 

Railroad  stocks,  groups  of,  74. 

Reading,  speculation  In,  26. 

Receiverships,  402. 

Rehypothecation,     account     of, 

214. 

Hughes  Commission  on,  389- 
90. 

Reserve,   two   lines   of,   304. 

Reserve  cities,  account  of,  256. 

Ridgely,  William  B.,  272. 

Risks,  nothing  immoral  or  un- 
economic in  taking,  88. 

Rockefeller,  John  D.,  32,  135. 

Rothschild,  Meyer,  death  of, 
190. 

Rothschilds,  9,  340. 

Room  traders,  number  and  de- 
scription of,  136. 

Roosevelt,  Theodore,  recom- 
mends publicity,  127. 

Royal  Commission,  investigation 
of  London  Exchange  by  the, 
376. 


Sage,   Russell,  31. 

Sales  of  stocks,  average  dally, 
70. 

Savings  banks,  amount  of  se- 
curities held  by,  51. 

Schiff,  Jacob  H.,  32. 

Seats,  price  of  Stock  Exchange 
138. 

Secrecy,  first  object  of  stock 
manipulation,  366. 

Secretary  of  the  Treasury,  pow- 
er of,  in  the  market,  312. 


INDEX 


437 


Securities,     amount    listed    on 
Stock    Exchange    in    1911, 
1902  and  1868,  52-3. 
distribution  of,  50. 
non-Exchange,  199-200. 
number  and  amount  of,  dealt 

in  in  London,  54-55. 
total  of,  in  the  United  States, 

49. 

world's  total  of,  49. 
Security   loans,   amount  of,  51. 
Seney,  George  I.,  31. 
suspension  of,  25. 
Sherman    Anti-Trust    Law,    en- 
forcement of,  30. 
Short,   definition   of,   72. 
Short    sales,    methods    of,    ex- 
plained, 151. 

Short  selling,  Hughes  Commis- 
sion on,  383. 
legal   aspect  of,  85. 
legislation     in     regard     to, 

384. 
Simmons,   J.    Edward,   32,   156, 

212. 
action  by,  at  time  of  McKin- 

ley's  assassination,  360. 
election   of,    as    President   of 

the  Stock  Exchange,  25. 
eulogy   of  F.   D.   Tappen  by, 

375. 

Skyscrapers,  40. 
Smith,  Henry  N.,  32. 
South  Sea  Bubble,  3,  351. 
Specie  payments,  resumption  of, 

358. 

Specialists,  description  of,   137. 
latest  rule  of  Stock  Exchange 

governing,   395. 
recommendations    of    Hughes 
Commission    in    regard    to, 
394. 


Speculation,    beginning    of,    in 
America,  4. 

definitions  of,  63,  64,  65,  66, 
78,  79,  81. 

distinctions   in,   379. 

early  law  to  check  evils  of.  2. 

German  experience  in  regu- 
lating, 419,  420. 

glamor  of,  65. 

Hughes  Commission  defini- 
tion of,  378. 

law  of,  378. 

Supreme  Court  opinion  of,  83. 

two  sides  of.  86. 

uptown  at  night,  19. 

use  of  credit  in,  63. 
Speculators,  economic  value  of, 

87. 

Speyer,   Sir   Edgar,  on   amount 
of  England's  exported  capi- 
tal, 55. 
Standard  Oil  Company,  suit  to 

dissolve,  30. 

Statistical   departments,  207. 
Statistics,    table    giving    move- 
ment of  money  in  and  out 
of  New  York,  1901-1911,  315. 

table  showing  amount  of  dif- 
ferent classes  of  stocks  and 
bonds  listed  on  New  York 
Stock  Exchange,  52-53. 

table  showing  bank  clearings 
in  New  York  and  the  United 
States,  1903  to  1911,  56. 

table  of  Stock  Exchange  list- 
ings of  bonds  and  stocks, 
1902-1911,  131. 

tables  showing  stock  clearings 
in  1893  and  1901,  166. 

table  giving  shares  traded  in, 
approximate  value  and 
number  of  impressions  on 


438 


INDEX 


tape  1890  to  1911,  187. 
table  of  average  prices  of  60 
active  stocks,  1873  to  1911, 
249. 

table  showing  ratio  of  de- 
faulted liabilities  to  bank 
exchanges,  1896  to  1911, 
354. 

table  giving  historical  record 

of    loan    certificates    issued 

at  New  York  1860  to  1908. 

362. 

Stediuan,    E.    S.,    poem    by,   on 

Black  Friday,  23. 
Steel  Corporation,  profits  in  the 

underwriting  of   the,   46. 
United   States,   the  syndicate 
formed  to  underwrite,  345-6. 
Sterling    loans,    description    of, 

UK 

Stock  certificates,  108. 
form  and  engraving  of,   119- 

120. 

Stock  clearing  house,  report  on, 
by  the  Hughes  Commission, 
394. 
Stock  clearings,  advantages  of, 

166. 

capacity  of,  167. 
establishment  of,  163-4. 
legality  of,  165. 
methods  of,  167. 
secrecy  of,  180. 
statistics  of,  166. 
Stock    companies,    benefits    and 

evils  of,  .115-6. 

importance   of,    described   by 
Nicholas     Murray     Butler, 
104. 
Stock  company,  organization  of, 

118. 
Stock  Exchange  Banks,  266. 


Stock    Exchange,    consolidated, 
account  of,  399. 

rules  of  New  York  Stock  Ex- 
change in  regard  to,  400. 
Stock  Exchange,  New  York,  or- 
ganization of,  7,  8. 

admission  to,  142. 

branch  offices  of  members  of, 
135. 

building  of  the,  38,   156. 

clearings  on,  163. 

commissions  of,  140. 

comparisons  on,  148. 

description     of,     by     Hughes 
Commission,  380. 

expulsions  from,   139. 

government  of,   155-6. 

jurisdiction  of,  134. 

law  Committee  of  the,  389. 

listing   requirements   of,   125- 
130. 

membership  of,  134. 

method  of  trading  in,  143. 

objects  of,  133. 

organization  of,  7,  8. 

patrons   of,   381. 

presidents  of,  155-6. 

privileges  of  floor  of,  145. 

qualification   for   membership 
in,   138. 

revision    of    constitution    of, 
8. 

sales  of  bonds  in,  208. 

seats  in,  138. 

Stock  Exchange,  London,  found- 
ing of,  3. 

methods  of,   157. 

quotations  of  prices  in,  161. 

Stock  Exchanges,  number  of  in 

the  United  States,  133. 

question  of  incorporation  of, 
396-398. 


INDEX 


439 


Stockholders,  number  of,  50. 
Stock  jobbing.  2,  3. 

in    1G88,   GO. 
Stock  list,  committee  on,  128. 

early,  4. 

Stocks,  different  kinds  of,  120. 
loans  of,   150. 
sales  of,  volume  of,  in  decade, 

381. 
Stock  Market,  beginning  of,  4, 

5,  59. 
comparison      between       New 

York  and  London,  54. 
connection  between  the  crops 
and  other  productive  agen- 
cies to  the,  210. 
divisions  of,  47. 
governmental         interference 

with,  83. 
mobility  of,  4G. 
origin  of,  2. 
value  of,  61. 
Stock   transactions,   volume   of, 

G6. 

Stock  transfers,  Tax  on,  Pref- 
ace. 
Stock    watering,    definition    of, 

113. 

Substitutions,   method   of  mak- 
ing loan,  282-3. 

Sub-treasuries,  number  of,  314. 
Sub-Treasury,  establishment  of, 

313. 
member    of    Clearing    House, 

313-315. 
system,  16. 
work  of,  316. 
Sugar  Trade,  39. 
Summer,  W.  G.,  account  by,  of 
action  of  New  York  bank- 
ers in  1838,   15. 
Sun,  New  York,  248. 


Surplus  earnings,  as  measure  of 
value,  100. 

Surplus  reserve,  how  ascer- 
tained, 299. 

Syndicate,  work  of  the,  108. 

Tape,  abbreviations  of  the,  184. 
description  of,  181-2. 
reading  of  the,  237. 
Tappen,  F.  D.,  32. 

eulogy  of,  by  J.  Edward  Sim- 
mons, 375. 

Tax,  on  stock  transfers,  preface. 
Taxation,  exemption  of  secured 

debts  from,  204. 
Technical  position,  248. 
Telegraph,  invention  of,  15. 
use  of,   in   Wall   Street,   189- 

190. 

Telephones,  introduction  of,  20. 
use  of,   in   Wall   Street,   191, 

279. 

Thomas,  Ransom  H.,  156. 
Ticker,  lure  of  the,  396. 
Tickers,  number  of,  183,  189. 
relations    of    the    Stock    Ex- 
change to,  183. 
the  timekeepers  of  the  Street, 

188. 

Time,  Account  of,  in  trade  op- 
erations, 182. 
the  stock  tape  as  a  recorder 

of  official,  188. 

Tips,  used  in  manipulation,  365. 
Tontine  Coffee  House,  6. 
Trade  papers,  239. 
Trading,  unit  of,  39. 
Trans-continental  railroads,  20. 
Trans-Missouri  decision,  27. 
Transportation,  Wall  Street  the 
directing  head  of  the  sys- 
tem of,  45. 


44(1 


1NDKX 


Travors,  William  R..  31. 
Tivasury.  relief  by,  iu  times  of 

crisis,  3(K). 
Trust    companies,    admitted    to 

the  Clearing  House,  203. 
description    of,   255. 
Trust,  definition  of,  110-11. 
Truth,  as  si>oken  in  Wall  Street, 

%       44- 

Two  dollar  brokers,  13G. 

Under  the  rule,  account  of  sales, 
141. 

Underwriting,     description     of, 

344-5. 
profits  of,  40. 

Underwriter,  work  of  the,  107. 

Unlisted    department,    abolition 
of,  128,  301. 

United  States  Bank,  expiration 
of  charter  of.  7. 

Usury,  law  of  the  state  in  re- 
gard to,  403. 

Value,  listing  no  guarantee  of, 

125. 

what  constitutes.  93,  95. 
Vanderbilt,  Cornelius,  30. 
his  celebrated  corners  in  Har- 
lem, 370. 

Vanderbilt,  William  H.,  30. 
Villard,  Henry,  31. 

Wall  Street,  who  and  what  is 

in,  30. 
Wall    Street   Journal,    199,   239, 

338. 


Warburg.  Paul  M.,  on  effect  of 

overflow   of   money,    310. 
Ward,  John,  30,  150. 
Wash    sales,    Hughes    Commis- 
sion condemns,  387. 
prohibition  of,  8,  147. 
used   in  manipulation,   30.~>. 
Wealth,  credit  is,  254. 
of  the  United  States,  49. 
stock  market  as  an  agent  in 

the  diffusion  of,  4(5. 
three  main  sources  of  the  na- 
tion's, 241. 
Webster,    Daniel,    on   value   of 

credit,  253. 

White,   Horace,   description  by, 

of  gold  room  operators,  211. 

on  the  speculation  in  gold,  85. 

White,  S.  V.,  32,  212. 

corner    of,    in    Lackawanna, 

370. 
Window  dressing,  description  of, 

294. 

Woereshoffer,  C.  F.,  32. 
Women,  as  investors  and  spec- 
ulators, 89. 

Women's  investments,   200. 
Woodlock,  Thomas  F.,  248. 
defines  speculation,  81. 
on    extent    of    manipulation, 

380. 
on  speaking  the  truth  in  Wall 

Street,  44. 
statement   by,    regarding   the 

movement  of  prices,  103. 
Yankee  rails,  introduction  into 
London,   10. 


(10) 


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